Let the capital out!
In 1961, Davis & Rock filed their certificate for a limited partnership. The market, vexed with corporations ousting founders & legacy capital providers competing to be ‘the richest corpse in the cemetery’ needed novelty in financing the technology revolution.
The rules were original: create a 100% equity structure, find unconventional capital contributors and make them limited partners, tie the general partner’s pay to the fund’s performance, set a liquidation date to emphasize urgency, and keep the number of investors below 100 to fly under the regulatory radar.
This birthed Venture Capital as we know it; caution balanced with aggression, every dollar invested and risk embraced fearlessly.
Robert Noyce, termed the Mayor of Silicone Valley, is profiled to be the founding father of all that is progress. But there is a strong conductor that enabled the very idea of VC; Arthur Rock, a self-made loner, a first-generation social climber, and a man who hated hierarchy with a passion. Along with Davis, he invested in intellectual book value (the right people) and was instrumental in pioneering the stock options scheme for employees.
“When I talk to entrepreneurs, I’m evaluating not only their motivation but also their character, fiber,” Rock reflected. “I believe so strongly in people that I think talking to the individual is much more important than finding out too much about what they want to do.” When the Davis & Rock fund wound up in 1968, their initial investment of $3.1 million was worth $77 million (roughly $646 million now), a performance that eclipsed Warren Buffet & the ‘Hedged funds’ in that period.
By 1969, their success spewed imitators all over and ballooned the funds flowing into venture capital by at least 50 times. Unburdened by preconceptions about what conventional wisdom deemed possible, extensive networking & radical dreams fueled both disruption and Silicone Valley into existence.
“Venture capital is not even a home-run business,” Bill Gurley of Benchmark Capital once remarked. “It’s a grand-slam business.”
A stock picker would consider it a win if a stock doubled in 2–3 years. But if venture capitalists embarked on the same quest, they would almost guarantee failure, because relatively few startups merely double in value. Most fail completely, in which case the value of their equity rounds to zero — an unthinkable catastrophe for a stock market investor. But each year brings a handful of outliers that hit the proverbial grand slam, and the only thing that matters in venture is to own a piece of them. There is no point gambling for success unless the success is worth having.