Venture Capital Basics: Part II of V

A History and origins of modern private equity

With few exceptions, private equity in the first half of the 20th century was the domain of wealthy individuals and families. The Vanderbilts, Whitneys, Rockefellers and Warburgs were notable investors in private companies in the first half of the century. In 1938, Laurance S. Rockefeller helped finance the creation of both Eastern Air Lines and Douglas Aircraft and the Rockefeller family had vast holdings in a variety of companies. Eric M. Warburg founded E.M. Warburg & Co. in 1938, which would ultimately become Warburg Pincus, with investments in both leveraged buyouts and venture capital.

Before World War II, venture capital investments (originally known as “development capital”) were primarily the domain of wealthy individuals and families. It was not until after World War II that what is considered today to be true private equity investments began to emerge marked by the founding of the first two venture capital firms in 1946: American Research and Development Corporation. (ARDC) and J.H. Whitney & Company.

ARDC was founded by Georges Doriot, the “father of venture capitalism” (former dean of Harvard Business School), with Ralph Flanders and Karl Compton (former president of MIT), to encourage private sector investments in businesses run by soldiers who were returning from World War II. ARDC’s significance was primarily that it was the first institutional private equity investment firm that raised capital from sources other than wealthy families although it had several notable investment successes as well.ARDC is credited with the first major venture capital success story when its 1957 investment of $70,000 in Digital Equipment Corporation (DEC) would be valued at over $355 million after the company’s initial public offering in 1968 (representing a return of over 1200 times on its investment and an annualized rate of return of 101%). Former employees of ARDC went on and established several prominent venture capital firms including Greylock Partners (founded in 1965 by Charlie Waite and Bill Elfers) and Morgan, Holland Ventures, the predecessor of Flagship Ventures (founded in 1982 by James Morgan).ARDC continued investing until 1971 with the retirement of Doriot. In 1972, Doriot merged ARDC withTextron after having invested in over 150 companies.

J.H. Whitney & Company was founded by John Hay Whitney and his partner Benno Schmidt. Whitney had been investing since the 1930s, founding Pioneer Pictures in 1933 and acquiring a 15% interest in Technicolor Corporation with his cousin Cornelius Vanderbilt Whitney. By far Whitney’s most famous investment was in Florida Foods Corporation. The company developed an innovative method for delivering nutrition to American soldiers, which later came to be known as Minute Maid orange juice and was sold to The Coca-Cola Company in 1960. J.H. Whitney & Company continues to make investments in leveraged buyout transactions and raised $750 million for its sixth institutional private equity fund in 2005.

Look for Venture Capital Basics: Part III of V here next week.

Brian Patrick Cork

Filed under: Business, Venture Capital , Business, Capital, Private Equity, Venture Capital

The Economist Magazine: “Global Heroes”

This article and introduction was forwarded to me by Dr. Iain Clelland at Radford University:

Folks,

From a tip passed on by our NRV SunTrust-sponsored 2007 Entrepreneurial Summit Keynote Speaker, Michael Simmons, I wanted to make you aware of this recent report from The Economist Magazine. It describes the tremendous trend in and importance of global entrepreneurship.  I have attached PDF files of some sections for selective reading/sharing (2-6 pages each) or you can read the entire report online at:

http://www.economist.com/specialreports/displaystory.cfm?story_id=13216025

Some excerpts from the report:

“IN DECEMBER last year, three weeks after the terrorist attacks in Mumbai and in the midst of the worst global recession since the 1930s, 1,700 bright-eyed Indians gathered in a hotel in Bangalore for a conference on entrepreneurship. They mobbed business heroes such as Azim Premji, who transformed Wipro from a vegetable-oil company into a software giant, and Nandan Nilekani, one of the founders of Infosys, another software giant. They also engaged in a frenzy of networking. The conference was so popular that the organisers had to erect a huge tent to take the overflow. The aspiring entrepreneurs did not just want to strike it rich; they wanted to play their part in forging a new India. Speaker after speaker praised entrepreneurship as a powerful force for doing good as well as doing well.”

[...]

“The globalisation of entrepreneurship is raising the competitive stakes for everyone, particularly in the rich world. Entrepreneurs can now come from almost anywhere, including once-closed economies such as India and China. And many of them can reach global markets from the day they open their doors, thanks to the falling cost of communications.”

“THE rise of the entrepreneur, which has been gathering speed over the past 30 years, is not just about economics. It also reflects profound changes in attitudes to everything from individual careers to the social contract. It signals the birth of an entrepreneurial society.”

“ VICTOR HUGO once remarked: “You can resist an invading army; you cannot resist an idea whose time has come.” Today entrepreneurship is such an idea… The triumph of entrepreneurship is driven by profound technological change… Another reason for entrepreneurship becoming mainstream is that the social contract between big companies and their employees has been broken… Yet another reason for the mainstreaming of entrepreneurship is that so many institutions have given it their support…The world’s governments are now competing to see who can create the most pro-business environment. In 2003 the World Bank began to publish an annual report called Doing Business, rating countries for their business-friendliness by measuring things like business regulations, property rights and access to credit…Robert Litan, of the Kauffman Foundation, suggests that the World Bank may have done more good by compiling Doing Business than by lending much of the money that it has.”

“Entrepreneurialism has become cool.”

Enjoy,

Iain Clelland, Ph.D.

Filed under: Business, Entrepreneurs, Radford University , Business, Entrepreneurs, The Economist Magazine

Decisions

It’s a bit unusual for me to offer more than one post on a given day.

It’s drizzling today.

I don’t like rain (even though Atlanta desperately needs it) unless I can run in it. Rain makes me melancholy. And, drops in barometric pressure apparently conspire with other elements to give me migraines. Also, drizzling is just so pathetic. I prefer a torrent of rain! Or, just no rain. Why else might be the point of such inclement weather other than to really piss me off because we probably can’t have soccer practice (I don’t care for Bermuda grass – and, don’t get me started there). Soccer was meant to be played under any conditions. Just not in Atlanta – or where Bermuda grass, and poor soil conditions and highly suspect roots, prevail (what an incredible metaphor for shallow things).

Such dizzying ruminations aside, I am feeling surprisingly bouyant in this late morning (even if the word bouyant is creating some consternation with me and spell check).

One of my business coaching clients, Sanders McConnell, has only just left my offices. We are both pretty excited. We had a great break through – call it an epiphany, with regards to his evolving business model. The pieces snapped into place on this overcast morning that suddenly feels so bright and full of promise.

NOTE: The inestimable PJ Bain must be running late himself today for our appointment. Possibly due to the rain. However, the extra times is allowing for this impromptu post – and, it feels great. And, I shall look forward to seeing PJ because he, himself is such a terrific example of truth and light.

I have the coolest job in the world. All I have to do is hang out with my friends all day and help them make better decisions.

God gave the world the Beautiful Game of soccer. And, He has given me experience, and discernment, and opportunities to use them for good.

Peace be to my Brothers and Sisters.

Brian Patrick Cork

Filed under: Business, Coaching, Entrepreneurs, Strategy , Business, Coaching, Entrepreneurs, Life

Venture Capital Basics: Part I of V

Venture capital (also known as VC or Venture) is a type of private equity capital typically provided to early-stage, high-potential, growthcompanies in the interest of generating a return through an eventual realization event such as an IPO or trade sale of the company. Venture capital investments are generally made as cash in exchange for shares in the invested company.

Venture capital typically comes from institutional investors and high net worth individuals and is pooled together by dedicated investment firms.

So… A venture capitalist is a person or investment firm that makes venture investments, and these venture capitalists are expected to bring managerial and technical expertise as well as capital to their investments. A venture capital fund refers to a pooled investment vehicle (often an LP or LLC) that primarily invests the financial capital of third-party investors in enterprises that are too risky for the standard capital markets or bank loans.

Venture capital is most attractive for new companies with limited operating history that are too small to raise capital in the public markets and are too immature to secure a bank loan or complete a debt offering. In exchange for the high risk that venture capitalists assume by investing in smaller and less mature companies, venture capitalists usually get significant control over company decisions, in addition to a significant portion of the company’s ownership (and consequently value).

Look for Venture Capital Basics: Part II of V here next week.

Brian Patrick Cork

Filed under: Business, Venture Capital