Founders - #203 Georges Doriot (Birth of Venture Capital)

Episode Date: September 8, 2021

What I learned from reading Creative Capital: Georges Doriot and the Birth of Venture Capital by Spencer Ante. ----Get access to the World’s Most Valuable Notebook for Founders by investing in a subscription to Founders Notes----1. He was very important because he was the first one to believe there was a future in financing entrepreneurs in an organized way.2. He brought a unique style to everything he did. 3. He called his course Manufacturing, but it was really his philosophy of life and of business.4. At Harvard, Doriot became a Yoda-like figure, dispensing wisdom to an ever-growing group of disciples.5. He got me motivated to start a business.6. A real courageous man is a man who does something courageous when no one is watching him. 7. If any information is to be exchanged over whiskey, let us get it rather than give it. 8. You will get nowhere if you do not inspire people.9. Always remember that someone somewhere is making a product that will make your product obsolete.10. Decades before economists appreciated the value of technology, Doriot realized that innovation was the key to economic progress.11. He upset the conventional wisdom by proving that there was big money to be made from patient investing in and the nurturing of small, unproven companies.12. He believed in building companies for the long haul. 13. I don’t consider a speculator constructive. I am building men and companies.14. A creative man merely has ideas; a resourceful man makes them practical. I look for the resourceful man.15. When ARD liquidated its stake in Digital, the company was worth more than $400 million—yielding a return on their original investment of more than 70,000 percent. It was the young venture capital industry’s first home run.16. Doriot never figured out a way to appease government regulators, who repeatedly threatened to put ARD out of business.17. More than any other person, Doriot pioneered the transition to an economy built on entrepreneurship and innovation.18. Celebrating anything less than the best possible result smacked of contentment19. A commercial bank lends only on the strength of the past. I want money to do things that have never been done before.20. Every successful man can usually point to a mentor that helped guide his career.21. One of things that profoundly affected Georges was his father getting wiped out financially.22. Doriot would go on to mentor thousands of other students, giving them advice, finding them jobs, guiding them in their careers, and taking an extraordinarily personal interest in each and every one of their futures.23. Doriot believed strongly in forming a close bond between student and teacher.24. Doriot described with a palpable sense of glee the importance of imparting a strong work ethic.25. Doriot encouraged his students to ponder the purpose of life and business. It was a highly unusual technique but the students realized Doriot was giving them knowledge of much deeper value.26. Always challenge the statement that nothing can be done about a certain condition27. There was still a fire that burned in Doriot. A passion that kept him searching for his next mission impossible.28. Doriot was a workaholic with no family responsibilities to divert his energies29. A committee is an invitation to do nothing.30. Lack of competent personnel was his most vexing problem.31. One word is omitted from Doriot’s vocabulary. That word—“impossible.” If a thing must be done, it can be done.32. Doriot was putting in twelve-hour days, seven days a week. 33. We cannot depend safely for an indefinite time on the expansion of our old big industries alone. We need new strength, energy and ability from below.34. A team made up of the younger generation, with courage and inventiveness, together with older men of wisdom and experience, should bring success.35. On his desk, Doriot kept a stopwatch. “Sometimes I use it to see how long it takes someone in a meeting to tell me the same thing three times,” he said.36. An average idea in the hands of an able man is worth much more than an outstanding idea in the possession of a person with only average ability.37. The riskiest investments, they were learning, held the potential to generate the greatest financial returns and the highest personal satisfaction38. He knew that if entrepreneurs weren’t self-driven and a bit egotistical they’d be punching the clock for IBM or General Electric.39. Creative ability knows no boundaries.40. It’s very important to cultivate the memory of great people.----Get access to the World’s Most Valuable Notebook for Founders by investing in a subscription to Founders Notes----“I have listened to every episode released and look forward to every episode that comes out. The only criticism I would have is that after each podcast I usually want to buy the book because I am interested so my poor wallet suffers. ” — GarethBe like Gareth. Buy a book: All the books featured on Founders Podcast ----Founders Notes gives you the ability to tap into the collective knowledge of history's greatest entrepreneurs on demand. Use it to supplement the decisions you make in your work.  Get access to Founders Notes here. ----“I have listened to every episode released and look forward to every episode that comes out. The only criticism I would have is that after each podcast I usually want to buy the book because I am interested so my poor wallet suffers. ” — GarethBe like Gareth. Buy a book: All the books featured on Founders Podcast

It wasn't until the second half of the 20th century that venture financing became a professional, large-scale industry. And the man who led that transformation was George Dorio. I can't recall exactly when I first came across the name of General George Dorio, but I do know that in 2002, when I looked into the sparse literature on the history of venture capital, his name kept popping up. I found a bunch of newspaper and magazine profiles, a chapter on him in a book or two, and a short film, but no full-length biography. He is the founder of the modern VC industry, but there's been remarkably little written about him. He is the first person who basically ran an institutional venture capital fund, and he played a lead role in getting the VC community to see itself as a real industry. The venture capital industry began

to take shape after World War II on the northeastern seaboard when in 1946, Dorio became president of the first public venture capital firm, Boston-based American Research and Development Corporation. The famous inventor, Charles F. Kettering, predicted ARD would go bust in five years. But Dorio proved him wrong. Over the next 25 years, as his firm financed and nurtured more than 100 startups, many of which became huge successes that pushed the frontiers of technology and business. ARD companies led the way in developing computers, atom smashers, medical devices, and new machines that desalinated brackish water. Dorio even backed George H.W. Bush's first company, Zapata Offshore.

He was very important because he was the first one to believe there was a future in financing entrepreneurs in an organized way. The more I researched Dorio's life, my fascination with an idea transformed into a fascination with the man behind the idea. Dorio was one of the most charismatic characters I have ever come across. Though I have never met the man, I fell under his spell. That was an excerpt from the book that I'm going to attempt to talk to you about today, which is Creative Capital, George Dorio, and the Birth of Venture Capital, and it was written by Spencer E. Ante.

And the reason I say I'm going to attempt to try to talk to you about this book today is because this book produced, prompted so many disparate thoughts and ideas in my mind while I was reading it that I'm going to try to tie together, but I might not succeed. I might be all over the map today, so hopefully you stick with me. I have an insane amount of highlights and notes and just tangents in front of me. So let me first tell you why I wanted to cover this book right now and what caused me to push this up the queue, because I have a couple hundred books. A lot of recommendations obviously come from you of books to cover in the future, but I wanted to put this towards the top because a few weeks ago, I did a two-part series on

the house of Rothschild, the Rothschild family. And there was a section in the second book that I did in that two-part series that really put together the importance of the Rothschild family and how they were able to generate so much wealth. And that book was written by Neil Ferguson. And in that section, he describes that the Rothschilds were responsible for inventing an entire new asset class. And that, surprisingly, was also mentioned in this book. So I'm going to read it. I'm going to skip ahead in this book. I'm going to read an excerpt about the Rothschilds that comes from Creative Capital. And I'm going to try to tie this into how this relates to the life and career of George D'Orio.

The most powerful bank of the 19th century, the House of Rothschilds, is a case in point. In the first part of the century, the Rothschild family rose to power, transforming a small merchant bank in Frankfurt and a clothes exporter in England into a multinational financial conglomerate by lending money to war-torn, cash-strapped European governments. Later on, they created the biggest bank in the world, and this is the most important part, by pioneering the creation of the modern bond market, enabling British investors to buy internationally tradable bonds on other European nations with a fixed interest rate. The Rothschilds made a colossal fortune by making these loans and by speculating on their rise and fall. So that summary that's in this book is an extension of what Neil Ferguson wrote in his book, The House of Rothschilds,

Money Profits is the subtitle of that book. It's one I covered a few podcasts back. But this idea that they created an entire new asset class. Now you fast forward 200 years later, the international bond market is something over like $100 trillion, $119, $120 trillion. And when I learned that or read that, that just blew my mind. It's like the idea that something so large and something so important was invented by just a person. It reminds me of the Steve Jobs quote, which is, I think he said this at a commencement address. Let me actually get the entire quote real quick. This is what Steve Jobs said. And he said, when you grow up, you tend to be told that the world is the way it is and that your life is just to live your life inside the world. Try not to bash into the walls too much. Try to have a nice family life, have fun, save a little money. That's a very limited life. Life can

be much broader once you discover one simple fact. Everything around you that you call life was made up by people that were no smarter than you. And you can change it. You can influence it. Once you learn that, you'll never be the same. So think about all the industries, all the people that are involved in the international bond market today that started with just an idea, this idea that humans in the past, today, and in the future will constantly create new asset classes. Okay, so that's the one idea from the Rothschild. The second thing is, so that's like the larger picture. The second thing that was so interesting that I learned in that book is you can create an

entire new asset class, right? But then inside of that, you can find something that you deem valuable, and you can collect and accumulate as much of this thing that you think is valuable as possible right so what i mean by that is in the book it talks about they were obsessed with accumulating gold and they talk about this in the letters within the family that like no we're just going to stack this is our old habit of accumulating gold this isn't like the early 1800s think about how difficult to be they would buy gold all over the world any kind of person government whatever the case was that was selling gold they would buy it and so when i. Any kind of person, government, whatever the case was, that was selling gold, they would buy it. And so when I got to that part of the book,

it made me think of something else. I'm going to try to tie this all together. And what's remarkable about the book that I'm talking about today is me and Spencer, the author of this book, have obviously read a lot of the same books. I'm not kidding. He probably mentions 25 different entrepreneurs and books that I've read for the podcast so far and that was one of my favorite things about this reading this book is because he kind of ties all this together so one of the books that I read and that he read that he references is Titan it's the biography of John D Rockefeller and in that book I would say Rockefeller's approach to the accumulation of standard oil stock is the same as the Rothschild's approach to the accumulation of gold.

And there were a lot of people, a lot of different people had equity in Standard Oil. Anytime they wanted to sell out, maybe they wanted to sell some stock to buy a yacht or whatever the case is, Rockefeller would buy it. And he talks about even way before Standard Oil is incredibly valuable. He's telling young partners in the business, it doesn't matter whatever you do. And I'm going to paraphrase here. He's like, listen, you sell the shirt on your back, but you don't sell that damn stock. And of course, many people didn't listen. He wound up taking his own advice and we see the result, building one of the most colossal fortunes in human history, right? So that leads us to this book and why I wanted to read that. I was like,

so you have people throughout human history, you know, humans decide something is valuable, you know, way before we even had this thing called money there. We know for a fact, if you study history, you're going to see that they're going to, they're going to invent new asset classes. Then there's going to be things within that asset class that are going to be extremely valuable sometime in the future. So we have George who creates an entirely new asset class venture capital, which in today's day and age is growing rapidly. But within that, so you have George starting a new asset class, but then the majority of his wealth is going to become from one company that he has ownership in, which is Digital Equipment Corporation. So at the same time I'm reading all these books and I'm having these thoughts, I watch and listen to this

interview by Marc Andreessen. And anytime I can hear Marc speak, I'm reading all these books and I'm having these thoughts. I watch this watch and listen to this interview by Marc Andreessen. And anytime I can hear Marc speak, I do. I find a very interesting thinker. He's extremely well read. And it hit me and it only hit me because I've listened to a bunch of talks by Marc Andreessen. Right. And it only hit me because I happen to be reading these two books at the same time. And I realized Marc does something that's really smart. He combines an extensive, deep knowledge of human history in general and business history specifically, right, with paying attention to the edge of the Internet or the edge of technology.

And so I thought about that. Like, why? Why is that important? I was like, all right, if you study, like if you're reading about the Rothschilds, you're reading about George Dorio, you're reading about all these other, the beginning of companies and all this other stuff. You realize, okay, you get a fundamental understanding of human nature, the fact that history doesn't repeat, human nature repeats, right? And that, you know, in the past, we've invented new asset classes. We're currently inventing new asset classes and in the future, we will. Well, how do you discover what the new asset classes are? You hang on, in our day, you hang on the edge of the internet. So what's the, I would say, like the largest or most well-known asset class has been invented recently. That's got to be cryptocurrency. Right. And so you have cryptocurrency in the hole and then you have other things like something I just read about.

And like on a lower level, like underneath that, like you could say NFTs and a completely new asset class. I just read I heard a story that's rather remarkable that can only take place on the edge of technology where you have this guy, this happened very recently, he went to spending something like $5,000 on an NFT, people from the outside obviously misunderstood. And we know this because we've covered this over and over again, beginning of a company, beginning of industries, it's always going to be misunderstood by outsiders, right? So this guy spends $5,000 on an NFT. It's a picture of a rock. 19 days later, he sells it for $1.3 million. And when I hear about that, I'm like, okay, that person is speculating in a new asset class and an NFT, just like the Rothschilds were speculating in international bonds 200 years ago. And so let me try to tie this all together. I think the lesson that I just learned from putting

all this together from Mark Andreessen, who again is a lot smarter than I am, right? Study history so you have a fundamental understanding of human nature. Read all the time. It's funny because now you see since a lot of people are working remotely, Mark, I've seen a couple remote interviews or remote talks by him. And I think it's his house, but his background is a ton of books. It's not even books in a bookshelf. It just has stacks of books everywhere. And again, this guy has unlimited, for all intents and purposes, unlimited assets. And he's telling you, right, his actions are telling you, hey, there's a lot of valuable things in these books. You should probably read them. So let's go, let's tie this together again.

And I'm trying to like, I don't have notes. I'm just trying to tell you these thoughts because I think the combination of all these ideas is very powerful. And I think he's a great example of that. It's like you, you read all these books, you study history, so you can have a fundamental understanding of human nature, right? Understand that what we're doing today may look new, but the principles are not new. So you have that fundamental understanding of human nature, and then you hang out on the edge of technology and edge of the internet. And I think that's where you can combine, if you combine these two, I mean, he's institutionalized this in a business, right? You combine these two and you can create great opportunities and potential

large financial rewards for yourself. So that is why I'm reading this book right now. So let's go into his biography real quick. I'm going to give you an overview because there's not going to be this cohesive narrative here. I'm going to give you an overview because there's not going to be this cohesive narrative here. I'm going to give you an overview of his life, and I'm just going to go through the highlights one by one, okay? So he had like 17 different jobs. That's obviously an exaggeration. So he's the founder. He's going to be the founder of American Research and Development Corporation, which is one of the first venture capital firms ever.

They call him the father of venture capital. He founds INSEAD, which is one of the world's top business schools. This was in Europe because he's born in Paris and then emigrates to the United States. He's a professor at Harvard Business School for four decades. And this is like when they didn't, at the very beginning, they didn't really have a curriculum. And then he serves in the military and that's why they call him general because he went to becoming brigadier general in the United States military during World War Two. So that's the outline of his career. Let's jump into a little bit about him. The Frenchman became arguably the most influential and popular professor at Harvard Business School's Graduate School of Business.

Over three generations, Dorio taught thousands of students, many of whom went on to become executives at the world's top corporations. He called his course manufacturing, and this is what's so fascinating to me. He called his course manufacturing, but it was really his philosophy of life and of business. And so that's something that pops up over and over again, is the way they approach when you're reading these books. One thing that jumps out at you is you really have to spend time developing your own philosophy on business and life. It's important, and it should be unique to you. At Harvard, D'Orio became a Yoda-like figure, dispensing wisdom to an ever-growing group of disciples.

And I'm going to read some of his maxims here. They're spread throughout the book. Before I do that, he stressed talking about what he taught his students. He stressed common sense themes such as self-improvement, teamwork, and contributing to society while spicing up his philosophy with practical and pithy words of advice. And so this is just some maxims that some of his students remember him saying in his lectures. A real courageous man is a man who does something courageous when no one is watching him. If any information is to be exchanged over whiskey, let us get it rather than give it an auditor is like a tailor he can

make a fat man look thinner or taller or younger you will get nowhere if you do not inspire people always remember that someone somewhere is making a product that will make your product obsolete and then it talks about the fact that he was just way ahead. They call him a visionary in the sense that his ideas, many of which come to fruition many decades later, and are actually only successful after other people can apply them in the future. So it says, Doria was one of the century's most visionary thinkers. He was able to recognize the importance of globalization and creativity in the business world.

And decades before economists appreciated the value of technology, Doria realized that innovation was the key to economic progress. And that is one of the most, for me, one of the most interesting parts of the book. And I think what is most influential to the world that we live in today is like all the value is coming from these big, stodgy companies. He's like, no, the value is on the edge. It's for the startups, the new entrepreneurs, the engineers, the and development in the office of the quartermaster general, he led a revolution in the military by applying science to the art of war. Under his command, the U.S. Army found substitutes for critical raw materials, developed new innovative items such as water repellent fabrics, cold weather shoes and

uniforms, nutritious compact food. And in one confidential project, D'Orio oversaw the invention of Doron. This is interesting. It's lightweight plastic armor that was named in his honor. For his achievements, he was promoted to the rank of Brigadier General and won the Distinguished Service Medal,

the highest U.S. military medal given to a noncombatant. And then something that's throughout the book is the fact that he was capable of independent thought. This is a little bit about that. In the military, he ruffled feathers by resisting orders so he could make sure soldiers had the equipment they needed to survive in the trenches. And in the financial world, he upset the conventional wisdom by proving that there was big money to be made from patient investing in and the nurturing of small, unproven companies, something we take for granted today. Right. But it

was a new thought in his time. And it was through his work at Harvard Business School. He's like, well, there's a deficiency, like there's a huge gap in the market of the American economy. He's like, so he's going to start a company to fulfill that. This is the need that ARD would fill. Right. So he says ARD would solve a major imperfection of modern U.S. capitalism. New companies were starved for money and professional management. Entrepreneurs at the time had a difficult, if not impossible, time raising capital. Banks were ultra conservative, reluctant to lend money to unproven ventures. And it's saying like this is something I had a misunderstanding of before. And I mentioned it to you before. It's like if you go back and you read like I read a lot of books on like Bob Noyce, the founder of Intel, the early days of Apple.

I've done a couple of podcasts on that. Henry Singleton, Teledyne. So I thought the first venture capitalist ever ever was Arthur Rock because Arthur Rock winds up having this crazy career. He's invested in in Intel, Apple and Teledyne. He was on the East Coast. He was actually a student of George, which he's in this book, which is amazing how this all ties together. But in all these other books that I'm reading, Arthur pops up constantly. He's a hilarious character. I wish I could find a biography on him. But he was talking, I was like, listen, this thing that we call venture capital, it was called adventure capital, which in my opinion is a way better name than venture capital.

But he's like, they called it adventure capital all the money we'd we would raise would come from like really the descendants of really rich families so think of like the descendants of rockefeller the whitneys people like that um and so in george's time because george is about george gets involved i think about 12 years before arthur does it like a dozen maybe like 10 years something in there so it says listen banks are very ultra conservative they're not going to lend to unproven ventures. So the only, the only people fulfilling this need were rich families like the Rockefellers. And he winds up co-investing with the Rockefeller brothers fund multiple times. And so check this out. This is the beginning and we're going to go, you know, we're not going chronologically. So this is, my notes are wild

for this, for this are wild for this book. So this is the beginning of the company. Think about this. I just think it's so fascinating to go back and think about the beginnings. Beginning of a company, beginning of an industry, beginning of an asset class. ARD's beginnings were modest. The first venture fund ever raised was $3 million. I think when he dies, if I'm not mistaken, his part of DEC, when he dies, just one company, and he invested over $100, right, was worth $59 million. And he dies in the 80s. So that's like, you know, that's for inflation, it's probably a couple hundred million

today. I don't know the exact number. So again, big things start, a quote from Jeff Bezos, big things start small, the biggest oak starts from an acorn. You've got to be willing to let that acorn grow into a little sapling and then finally into a small tree. And then maybe one day it'll be a big business on its own. And we see that here, $3.4 million. Just one company invested for himself. Obviously, the other people involved, the founders involved, other people made a lot more money. $60 million when he dies.

Okay, so it says, this is funny. This is what we would call marketing today. Dory, I'm going to call him George because I'm probably mispronouncing his name. George was exerted. George also exerted an influence to his writing speeches and ARD's annual meetings. So we would call that marketing today. He believed in building companies for the long haul. That one sentence is going to give him all kinds of trouble because at the time it's a public company. They want earnings right now. And this is something that he winds up, a lot of his students wind up going and they move to the West Coast. They start all these venture firms. Some of them are still in existence today, like Greylock. And they wind up fixing the fatal flaw that George had and have more notes in

the future is the structure. And it wind up, he had all kinds of issues with the SEC. He has to go to war with the IRS. He winds up losing all of his top talent later on because he just can't compensate them. And like one case, they wind up, like his second or third in command winds up incubating a company helping a company grow the founder of that company makes 10 million dollars the person that led the investment and discovered the opportunity made got a two thousand dollar raise so just another example of just learning from the mistakes so it says um george often worked with the company for a decade or more before realizing any return that is why he often referred to his company as his children. And now we get to a main theme before I read the very next sentence to you.

He was all about people. He thought people were made all the difference in the world. The person that actually taught, I think, teaches that point, how people are way more important than anything else, is if you read Ed Catmull, his book, Creativity Inc. I did a podcast on a long, long time ago, maybe like the 30s, something like that. People would make the argument that Ed Catmull might be the greatest manager of creative people ever. But he has a couple of quotes from his book I want to read to you. Ideas come from people. Therefore, people are more important than ideas. Getting the team right is the necessary precursor to getting the ideas right. And one more quote.

Based on my reading of this book, I think George would agree with that quote. So he says, Let me tell you my note here. I want to make money, but I won't disregard a good person for a slightly better return. When you have a child, you don't ask what your what return you can expect. He was quoted in a Fortune magazine story. Of course, you have hopes. You hope the child will become president United States, but that is not very probable. I want them to do outstanding, outstandingly well in their field.

He never had children of his own. He's talking about the companies he's working with, right? And a lot of the people, because he winds up being a decade or two older, he has like surrogate sons. Like there's three people in particular that he winds up thinking of as, you know, adopted sons, for lack of a better word. And if they do, the rewards will come. But if a man is good and loyal and does not achieve a so-called good rate of return, I will stay with him. If I were a speculator, the question of return would apply, but I don't consider, but I don't consider a speculator, uh, constructive. I am building men and companies. And so this idea of developing relationships was extremely important. Ken Olson, who's I'm going to talk about later. He's one of the founders of Digital Equipment Corporation,

which is George's biggest, like biggest hit he's ever done. They, they have like a very close relationship and they had one way before Digital Equipment Corporation turned into the, you know, the gigantic company that became. And there's actually a, somebody actually sent me a book recommendation that, uh, there's a biography on Ken I haven't read yet. It's called The Ultimate Entrepreneur. And so that idea, I am building men and companies. That is also very similar. We saw that there's a few people that popped in mind when I read that sentence. Actually, when you think of Bill Bowerman, co-founder of Nike, he was building track stars at Oregon, right?

Phil Knight was one of his runners. But his concern was what kind of man you would be after you left and matured into full adulthood. That's why his biography is what kind of man you would be after you left and matured into full adulthood. That's why his biography is called Men of Oregon. Les Schwab, same thing, read his autobiography. He talks about, yeah, I'm very happy that I built a successful company. I'm happy that I gave away 50% of the profits that he mentored and how, in many cases, he was considered like a second father to people that he helped get into business. A lot of them wind up asking him to be in their weddings.

And he's like, that's just some of the – it was almost – it was even more gratifying than the building of the company. So this is a little bit about his relationship with Olson, which we'll talk about later, is a perfect match. In Olson, George found the archetypal engineer turned entrepreneur who was dedicated to making his company's success. I like this quote from George. He's describing Ken. A creative man merely has ideas. A resourceful man makes them practical. I look for resourceful men. When ARD liquidated its stake in

digital, the company is worth more than 400 million. They wind up doing like, I think right before he dies, they're doing like $99 billion a year in the 80s, something like that. So it says when they liquidated stake, the company's worth 400 million, yielding a return on their original investment of more than 70,000%. It was the young venture capital's industry first home run. And then now the author, I'm still in the introduction. This is crazy. Now the author tells us why the book was written. George was the prophet of this new startup nation,

the leader of a social and economic crusade that democratized the clubby world of finance more than any other person. Through his teaching, writing, and leadership in the military, academic, and financial worlds, pioneered the transition to an economy built on entrepreneurship and innovation. For playing this role, George should be revered as much as other well-known business titans such as J.P. Morgan, Rockefeller, or Carnegie. Hopefully you'll agree with me after reading this book. Okay, so let's go to his early life a little bit. I want to tell you about the influence of his

father. Because George is definitely a little bit of a hard ass or definitely a hard ass. Extremely like Spartan disciplined person watching costs like a hawk was very concerned about like, applying perfection to not only like your work life, but also like your manners, the way you dress, like he was just very, like, very random, like a very tight ship, even personally, some of that's going to come from his father. So this story, I'm just gonna give you the end of it. George places, he's a young kid at the time, he places second overall in his class, he runs home with his report card, and he's expecting his father to be proud and his father just looks at him and said why second and this is the lesson that george took away from that and also this is going to be very similar to how he acts later on he began to understand the reasons behind his

father's behavior his father he would tell a friend years later when recalling the incident was not concerned that george had failed to achieve first place in his class. No, no, no. He was concerned that George was happy placing second. To his father, who's a famous automobile engineer, who had raised his children to strive for excellence in everything they did, celebrating anything less than the best possible result, smacked of contentment. And contentment, his father believed, is a state of mind that recognizes no need for improvement.

And so this is a little bit about his father's career. Every successful man can usually point to a mentor that helped guide his career. For August Dorio, that man was Armand Pujol. So that's the head of that famous car company. How do you say that? Pujol. Pujol. Okay, so Pujol.

So it says Armand august's mutual fascination with machines and with the future and shortly after his return to the factory sent august on a series of apprenticeships in order to learn the latest techniques in automobile design and engineering gas-powered explosion engines as they were called at the time so this is the late 1800s and they're trying to figure out how to mass produce, or I guess first make and then mass produce automobiles. And the reason this is important to the story of George is because his father does extremely well. He's essentially the right-hand man of one of the greatest industrialists in Europe at the time, right? And he leaves that job because he wants to take a risk on himself. And he starts his own company, his own automobile company, making cars under his own name.

And he does well for a while. And then World War I happens. And his factory is destroyed. He had a partnership with the brothers, the Bentley brothers. You know, the car that's extremely popular nowadays. So at the same time that France has to take over his factory to produce supplies for the war, he loses the partnership with the Bentley brothers and he winds up having to retire early. And so why is that important? Two things. One, after World War I, the family realized there's no opportunity for their

son. George, I don't know, I think he's like 20, something like that. So they send him to America by himself. And two, for the rest of his life because he saw what happened to his father and this is kind of counterintuitive he was extremely risk adverse and conservative with with money because he saw how fortunes like even when you you know you're at the highest of highs how rapidly things could change here's another maxim from from uh from george a and his influences his thinking on creating this new asset class. A commercial bank lends only on the strength of the past, said George in one of his favorite maxims about the venture capital business.

I want money to do things that have never been done before. And then we also see something in George's mindset, which a lot of motivation for doing something new could be like your dissatisfaction with the current state of affairs, right? I just went over the autobiography of James Dyson. You just could not believe how crappy the fact that vacuum cleaners were clogged immediately when you start using them. How the hell in 100 years of use had nobody thought a better idea? And it just drove him insane. There's a lot of that with George because he's on the East Coast.

He's at Harvard. He's back and forth between New York. He knows about a lot of investment bankers. And he's just like, they're not entrepreneurs. They have no desire or focus to start anything new. They just want to work for these companies that have already been established a long time ago or these family banks that are multiple generations. And he says, he just talks about the stuff he doesn't like on Wall Street. They rarely, if ever, took a hands-on role and helped to nurture a company uh he george realized how critical such nurturing was in determining the success of a new venture i don't know anyone on wall street who ever built a company they simply furnish money and that is the least important part of it

and so at this point in his life he is still he's just a student at harvard he's not teaching there yet he winds up henry floor so i'm going to skip over a lot of stuff people I've done podcasts on. They're in the archive if you're interested. But one person that I have to tell you about is that Henry Ford influenced George's thinking. So this is a little bit about that. In the spring of 1913, it took almost 13 hours to build a Model T. So 13 hours to build one car. By the end of the year, when a complete assembly line was in place

it only took 90 minutes uh the price of the model t could then therefore because you make your way more efficient it goes from 950 dollars 15 years later it's a third it's like less than that's the 290 dollars or yeah 290 dollars by that time ford was producing half the motor vehicles in the world europe and again he had a front line seat a front row seat at this, right? Because this is what his father did. Europe may have pioneered the development of the automobile, but mass production was a U.S. innovation. When George cracked open the pages of American machinists and machinery,

this whole new industry of machinery and mass production was unveiled before his eyes. After all, automobile manufacturing was like the early 20th century's version of Silicon Valley. It was an industry transforming the world and creating vast riches for the select few who mastered the new techniques of mass production. Why is that important? Because he sees in just a few decades, it goes from this, you know, basically handmade industry to one that's generating gigantic wealth, made Henry Ford one of the richest people on the planet at the time, flipping through the pages, gave George an appreciation for the dynamic nature of technology and the emerging power of America.

So you have this going back and forth, it's talking about what's happening in World War I. Every single one of George's cousins dies. They're all a little older than him in World War I. The country's in shambles. His family's wiped off financially, so that's when they send him to America. And I already told you this, but I'm going to read this to you.

One of the things that profoundly affected George was his father getting wiped out financially. It affected his attitude towards risk. He was very, very cautious. And then we see a young George go through something that every human goes through. He's on a boat heading to a country not everybody goes to this experience but this idea of like what the what what does my future hold like what is

actually going to happen to me uh he had no family or friends in the united states nor much more much nor much money to fall back on he was facing the most difficult challenge of his life standing on the deck of the sea looking out into the deep dark void uh george must have wondered what does my future hold what am i going to make of myself and what happens if i fail and so we're going to see this this fear of failure that's extremely powerful one of my favorite uh ways to illustrate this is if you ever hear jimmy ivine talk he talks about this he's like listen you need to make fear a tailwind instead of a headwind fear in most cases most cases, you know, it stops people from trying. Jimmy used it as fuel.

And in that great documentary, Defiant Ones, he talks about it. He says, Jimmy says fear is a powerful thing. It's got a lot of firepower. And then he goes on to talk about making fear a tailwind instead of a headwind. Anyways, the reason I bring that up is because there is a cautionary tale to this story, too. This fear of failure turns George into a workaholic, seven days a week, always on it, just completely obsessed. There is, at the end, though, he's married.

He has this wonderful marriage. They're married for, like, 50 years. And the end of the book, they buy a vacation house. They're going to build a dream house now that he's retired. And his wife writes him a letter saying, now we get to spend all this time together. The next year, she gets diagnosed with cancer. Two years later, she's dead. And so this idea that you're going to put off living your life for some like future date of retirement, that you have more time, like the future was always uncertain. And so the cautionary tale, because I'm not going to read those highlights because i'm not i'm not going to cry on the podcast like it is devastating he is

devastated by this loss and he's writing her poems he winds up getting inducted into um into the business hall of fame and his speech is not he's like you think my life's a business story my life's not a business story it's a love story and he writes a love story. And he writes a letter. He reads a poem, like a love letter and a poem to his dead wife. And everybody's in the audience crying. Lucille Ball is there. She winds up having the poem printed out, framed and sends him a note that like, you know, what you said touched my soul, changed my life. And for like the next like 10, he outlives his wife for like 10 years and it's just devastating so again cautionary tales there i know that yeah i'm prone to this if you're listening to this you probably are too you know there is a element of being obsessed

and working all the time it's a mistake it's a mistake that happens over and over and over and over in these biographies i'm telling you i've read hundreds of them they all regret this there is probably a small percentage of humans these complete psychopaths that don't have feelings for other humans. You know, I'm not talking to those people, but for a normal person, a normal driven person that wants to work all the time, if you over optimize your work life at the expense of your family, you are going to regret it. And it's obviously a difficult thing to avoid. If you have some of the smartest, most productive, most capable, formidable people that you and I are studying, and they make this mistake. We have to use their examples as cautionary tales. You read these poems, these

letters, these thoughts that George is having about his wife after she died, and it is obvious he's filled with regret. And it's over. Like his wife, there is no, you can't, that's the worst possible situation you could be at the end of your life because you can't go back and fix that. And I think the best way to hammer that point home is if you buy the book and read it. It's the last chapter. It's called Love Story.

It's, you know, just read that chapter. It'll drive that point home. And I don't think, you know, if that one chapter might be able to cause you to avoid making that same mistake, you know, the price of the book is it's priceless. Like it's just not a better return on investment from that. Let's go to George when he's 26. He's working in investment banking and he hates it. His outspoken temperament did not fit well within the stayed environment of an investment bank.

And he was never obsessed with accumulating extreme wealth. The chief loray of the investment banking game, so it was not at all too surprising that when the dean of the Harvard Business School asked George to come back to Massachusetts and become an assistant dean, George accepted the offer. And so this is going to be his four-decade-long association with the Harvard Business School. And so this is a little bit about that fear of failure i was just mentioning he was haunted by visions of failure so george worked overtime to ensure that his teaching debut would be a success and he's like

i took this job but i don't know if i can do it i don't know if i can teach or not and so he figured a way to increase his chance of success just spending more time at it at least it was a subject that i felt close to and it's and i and I had studied it very hard. So I spent hours and hours and hours at night studying and I took further courses. And then I just have a note, a few paragraphs, a few pages later rather, good guy George. Over the next four decades, George would go on to mentor thousands of other students, giving them advice, finding them jobs, guiding them in their careers, and taking an extraordinary personal interest in each and every one of their futures. In fact, throughout his 40 year teaching career, George kept detailed files on many of his students,

which he updated on a regular basis is a great anecdote later in the book where one of his students asked for advice. I take this job like, you know, I can double my salary, something like that. You know, I have a young family and George's like, no, you should go and get an MBA or whatever the case is. And so he wound up not taking the advice. He winds up getting the job. And like a couple years later, I think nine years later, something like that, the student winds up running the company, being promoted to the president or whatever the case is. And George sends him a quick note. You were right. I was wrong. Congratulations. So I thought that was really cool. This is just a fundamental understanding of this guy is he comes up with his own philosophy on everything. He wants to think things through for himself.

In the classroom, George began to develop a novel educational approach where most professors kept a chilly distance between themselves and their students. George believed strongly in forming a close bond between student and teacher. From the start of his teaching career, he felt that every student deserved personalized attention. A second tenet of his early philosophy, which he absorbed from his father, was drilling the value of hard work into his students. So he's writing a letter, says George, described with a palpable sense of glee

the importance of imparting a strong work ethic. I do believe that the men leave my class. They have a definitive notion of what an honest day's work ethic. I do believe that the men leave my class, they have a definitive notion of what an honest day's work means. The third tenet of his philosophy was an emphasis on pragmatic management, on the nitty gritty realities of day-to-day decision making, not high flout and theories. A lot of this book is like personal letters he wrote. There's another book I almost read, and I'm glad I did this one first because I wanted an actual biography. It's called The First Venture Capitalist is the term.

And it's, I think almost all of it's like his writing or like somebody like edited the book together. It's a lot of his notes, his letters. He also like would write in public as well. And then like reminisces from his students. But this is an example. So we have a lot of quotes in this book from his own writing. This example of that crazy work ethic. I haven't had a day's rest for four

months. And so right away, he becomes really good at teaching. He gets a note from his class that says, you've given us something of far greater value than case books or assignments you gave us yourself. As you pace back and forth on your on the deck before us you looked upon our group not as a class but as individuals needing guidance you gave us needed advice encouragement criticism you gave us original you urge us into original and constructive thinking upon difficult problems and develop powers of analysis and understanding of infinite value in days to come and so this is this is the effect it had on receiving this note had on him. It was remarkably poignant moment for George, a major milestone in his young teaching career. The

heartfelt note from his students proved that George, despite all of his doubts, was hitting his stride as a teacher. This is more on his philosophy and what his class was like. George began to mix some philosophy into his pragmatic teaching methods. He would stand in front of the class pacing back and forth, and he would encourage his students to ponder the purpose of life and the purpose of business. It was a highly unusual technique,

but the students realized George was giving them knowledge of much deeper value. He peppered his lectures with a number of pithy aphorisms, which pupils would take notes on. Here's a couple examples of that. One should not only be able to criticize, but should also have a suggestion to make. Another one, don't challenge others' statements. Have them repeat them over again. Ask about prospects who didn't buy your product.

Always challenge the statement that nothing can be done about a certain condition. He used his course as a forum to explore new subjects in business that were assuming greater value, assuming greater significance in his view, such as entrepreneurship and leadership. George devoted one class to the process of financing and building a new company. It's really interesting how all of the experiences that he's exposed in his life are going to combine together to create something new. The class that he's teaching at Harvard, he winds up serving on a bunch of boards, like 20 different, the boards are like 20 different companies. His experience in the military, his experience that he saw with his father,

all leads to, and then his distaste for a lot of what was happening on Wall Street, all is going to culminate into this idea. It's like, hey, we really need to create a way to start, to get talented young people to start more companies. Okay. So at this point in his life, he's married. They never have children. But it says George was a workaholic with no family responsibilities to divert his energies. And so because he was a workaholic, because he didn't have personal distractions. So now he's,

you know, setting up, he's doing part-time consulting with the military. He's running his class. He's serving on 15 to 20 different boards. He's going back in the summers and going back to Paris to start this international business school. And so this is when he is approached to do ARD. And what happens is they put the plan together, and then World War II breaks out, and they have to wait, and then they form ARD in and then world war ii uh breaks out and they have to wait and then they

they form ard in 1946 after the war and so ard actually starts out as this like group of new england businessmen and uh it's like the the the president of mit and it's they're going to call themselves uh enterprise associates so and and this is like a very weird structure. Enterprise Associates would raise $300,000 from 20 different people to finance the final stages of promising research projects. So there's this like little group is meeting with various entrepreneurs. Most of these are like academic product projects. They think they can turn into a product, right? So they look for ideas. They wind up having a dinner. They find one company. It's this company called National Research. So a bunch of people at the dinner say, OK dinner. They find one company. It's this company called National Research.

So a bunch of people at the dinner say, OK, this is May 7th. The reason I'm telling you that the state's important. May 7, 1940. OK, we're going to do this. We're going to fund this company. Right. May 10th, Germany invades Luxembourg, Belgium and the Netherlands and France. And so most of the people were at who are at the dinner who agreed up the money, a couple of days later saying they're going to withdraw. It's not a good time to do this. And so this is what they learned. Almost everybody backed out, said they're not going to do it. But the people that were still going to do it, there was a group of them, they wind from this experience. So the experience of enterprise associates taught the venture industry pioneers an important lesson. They realized it was a good idea. It might not be a good idea to have to have a company with only enough money to find and study projects. Right. So you have you have people looking for money. Then you come up. Then then they they're saying, OK, we're going to we're going to work with you. And they essentially they say they pass the hat around. Right. So you can think about like, okay, we found this guy or this company. Do you want,

let's have dinner. Do you guys, let's all throw in, right? So it says, this is not a good idea. The company should have its own money instead of the money being withheld. So it says, it might not be a good idea to have the company with only enough money to fund and study projects, then pass the hat for capital to start the new company. A company should have its own capital, they concluded. That way it would be insulated from events outside of its control. And so it says for the time being, though, the war snuffed out the formation of the nation's venture capital industry just as it was getting off the ground. Six years later, though, George Compton and a bunch of the other members of the Brain Trust would revive their plans to

create a regional venture movement. But first, they had a war to fight. So I'm going to skip over a lot of his war work, but I do want to talk to you about how his work in the military during World War II actually helped inform his later career in investing in new companies. So it says, George learned how to become a venture capitalist during the war, for it was through World War II that he underwent the most significant metamorphosis of his life transforming himself from a professor of business into a world-class builder of innovative new enterprises when george became head of the military planning division he began running in a sense his verse his first venture capital operation the purpose of his division was to identify the unmet needs of soldiers and oversee

the development of new products to fulfill those needs. One thing he learned, he had a bunch of different offers because he'd done consulting and stuff for the military before through his position at Harvard Business School. And so he's got a couple of different opportunities to choose, like, who's going to work with. And really, the key lesson I learned from this section is like you should always, if you have a few options, work with the smartest people you know. And so one of his former students is running the Quartermaster Corps at this time. And so he says, I had several other offers from different parts of the Army and Air Force, but he explained the decision later in his life the only and the only reason i went to the quartermasters is that i considered general gregory the most intelligent officer i knew and so one of the advantages that george had during this time is the fact that the limiting factor then and probably now is good people right leader people with leadership skills

and brains and so there was all this like deficiency of staff constantly and they're like how the hell is george finding all these qualified people? Well, he had at this point, he'd been a teacher for 15 years. So he's got like this Rolodex, so to speak, of just driven, intelligent people. And he and that's what something he did that was really smart. He's just maintained and nurtured these relationships for decades, in some cases, for his entire life. Right. In the case of Ken Olson, he's he's almost about to die. They're on a board together. Like, you know, they've known each other for Ken Olson, he's almost about to die. They're on a

board together. They've known each other for, what, 30, 40 years, something like that. So this is a quote from a newspaper around this time that gives you a little indication of what that means. I don't do the work. I just pick the right, bright men to do it for me. While teaching at Harvard Business School for the last 15 years, George always had a sharp eye out for able young men. Today, a lot of them are working for him and never fail to deliver for their indefatigable chief. One word is omitted from George's otherwise complete vocabulary. That word is impossible. If a thing must be done, it can be done.

Two good ideas for you here. So he's got a great team, but in the service of this goal so he's got a they're they're in charge in many cases of making sure all the the people the actual people fighting the war have the right equipment right and he just winds up the main idea here i guess one of the good ideas here is in the service of this goal of building the best team he also paid attention to details others missed. And so at the time, he's requisitioning supplies for tankers. And so he's asking the questions, like, well, how much space is in there?

Like, we need to know. It's like, no one knows. So it says, before the war, no one thought to measure the foot space in the tank to see how much the soldier's shoes would fit in such a cramped quarter, or to see how soldier's shoes would fit in such cramped quarters. But George did. In fact, he had a tank delivered to his parking lot in Washington, D.C. So again, just paying attention to details that other people miss that are important to your job. And then the second good idea is he would break the chain of command because he didn't want the information he was getting

to be filtered from other people. So what I'm about to read to you is, this is something he had in common with the founder founder of UPS, who would insist on talking to drivers, like every time he'd pass a driver on the street, he'd pull over and just talk to them, right? Jeff Bezos did this with anybody could email jeff at amazon.com. He wanted like unfiltered information from his customers. The founder of Kinko's, we saw him do this, Paul or Fala, right? They all wanted, the main theme here is they all want unfiltered information from the front line.

They understood that was the most important part and they knew that layers of managers distort the message. It's very similar to like if you played the game telephone when you were a kid, same things happening when you're adults except because you've added all these layers of management. So it says, one of the wonderful peculiarities of George was that he didn't want word coming back from channels. And so this description of that, he knew it would take forever and they'd run into people that didn't agree and they'd get stifled. He wanted us to

violate all kinds of rules and regulations and just write us a letter and just write a letter and put a stamp on it. It was a rare opportunity to express myself to someone who would read it with intense interest and start to do something about it. It would not be laid in a desk and forgotten about. It would not be stifled because of bureaucracy. It would be moved and action would be taken on it. I'll just give you an idea of the size of the organization he's running. There's 542 people when he joined. There's more than 2,000 at the peak that were working directly under him, and he had a budget of a couple billion dollars. He's also, again, working 12-hour days,

seven days a week. Okay, so let's go back into the main point of this, right? He's starting a new asset class. Fast-forwarding, this is 1946. They start the American Research and Development Corporation, also known as ARD. ARD was formed, this is George writing in the company's first annual report, to aid in the development of new or existing businesses into companies of stature and importance. ARD was the first professional venture firm that sought to raise money from non about, like, you've got to stop being afraid to take risks. Like have various means for selecting the most attractive possibilities and for spreading the risk on those selected. Does this not furnish a sound business basis for trying new methods of applying development capital? We cannot depend safely for an indefinite time on the expansion of our old big industries alone. We need to create new ones, right? That's where all the opportunity is. We need new strength, energy, and ability from

below. We need to marry some small part of our enormous financial resources to the new ideas which are seeking support. And this is a big headache they wind up having. The idea of venture capital was so new that ARD's founders were forced to re-engineer aspects of various financial regulatory structures in order to make their idea viable. I'm going to omit a lot of this because they go into way more detail than I want to on the podcast. But the reading of this is like there's just all these arbitrary rules. And what's so interesting to me is like they didn't just accept, oh, this is how it rules.

No, they thought, okay, the way you have this set up precludes me from pursuing this opportunity. So guess what? I'm going to get these laws changed. Before ARD could offer its stock, for instance, it had to obtain a number of exemptions under the, and there's all these, and the reason I want to read all this to you is because like, it's like kind of boring in the sense of like the investment company act of 1940 and this other, like all these little weird rules and acts and pieces of legislation that had been passed decades before that would preclude opportunities that George and his team were trying to pursue, you know, 30, 40 years into

the future. And so one way they get one of these changed is because like the guy that wrote. So let's see what they George was hated by the fact that one of its board members, this attorney, was also counseled to the National Association of Investment Companies that helped write the Investment Company Act. This is a little bit about what kind of projects they're looking to fund. The firm set clear guidelines for making an investment. Projects should have passed the test tube stage. They should be protected through patents or specialized knowledge and techniques and can afford an attractive opportunity for eventual profits and so what they do is they say hey we raised a little bit of money all you you know uh all you people doing experiments uh all you people with long

haired crazy ideas come to us and so they get you know they they get i don't know hundreds of of um of pitches and then they only select, obviously, a few. This is just a few about them. They go into so much more detail. But there was like, for example, these are some of the first few ones. They accompanied developing a handgun that melted car engine grease by vaporizing a solvent and injecting it into automobile transmissions. They funded two MIT scientists who were developing a two million volt generator that was eight times more powerful than existing machines. Another company

that sold radioactive isotopes and made radiation detection machines. This is right at the very beginning of nuclear age. And then we see a quote here from George talking about a good synopsis of his idea. George best explained the formula in his 1949 annual report. A team made up of the younger generation with courage and inventiveness matched together with older men of wisdom and experience should bring success. And so part of this was interesting to me. Because they're a public corporation, they have this immense pressure from other people or misunderstanding, maybe is a better way to put it. They wouldn't have been selling assets sooner than they'd want to. This is one of their first small wins.

If they held on, they could have made more money. One startup fulfilling its high hopes was TracerLab. Its founder, this guy named William, credited George with inspiring him to focus the company on its best opportunities. The general, oh, so everybody in the book calls him the general, by the way. The general provides two things that everybody in the book calls him the general, by the way. The general provides two things that a young scientific organization most needs, enthusiasm and appreciation. Like all the others, I started out with a handful of ideas and a lot of long-range plans. In a couple of years, I got bogged down in detail.

George stepped in just in time to pull me out of the rut. So they wind up getting their first capital gain ever. It was $37,000 when it sold 1,700 shares of TracerLab. So you get some press coverage, get some wins. I'm fast forwarding a little bit. And really his whole issue the whole time, he's like, I'm trying to build a great organization and I don't have enough money. I can't raise them. Investment banks wouldn't underwrite. So it says, despite the successful offering and positive coverage, Newsweek, Barron's, other outlets, revealing that half of ARD's ventures were showing a profit, ARD could still not convince an investment bank to underwrite its second offering. And so this is where he expresses a frustration of the lack of money he's able to raise. Like,

I have way more opportunity to pursue than money. He expressed frustration over the growing gap between the rhetoric and the reality of the venture capital business, if it could be even called a business at this point. I am afraid that, as usual, people believe in venture capital as long as somebody else's money does it, he said. People will make long speeches explaining that they don't want the government to finance small businesses or new businesses, but they still do not want their own money to be used for it either now this another great thing about reading this book is like he's pretty funny this made me chuckle and it also you know talks about a bit of a hard ass on his desk he kept a stopwatch sometimes i use it to see how long it takes

someone in a meeting to tell me the same thing three times he said so the book is goes into all detail like a very interesting like each company will have like several paragraphs of what it's what's happening in it what they do um i but i want to point out one thing that a lot a large role when you hear of people that work with george and raise money from them some of which wind up being his employees uh in the venture firm they all say similar say similar things. He helped them manage their mindset. And so I think this is an example of that. The general understood that this would be a slow thing, said the founder of High Voltage. At early board meetings, I would try to give an accurate counting of the profit and loss. He would look through me and ask what I really thought George's outlook and this is the founder

still talking George's outlook inspires and transforms my own lifting me above the worried plane that he was on grappling with these myriad challenges led George to believe that managing talent was the most important ingredient in the startup equation and this is what he says about this and the note of myself i already told you this is about ed catmull uh it's very similar to what ed catmull said about people being way more important than ideas uh so he's just as george writing in his annual report an average idea in the hands of an able man is worth much more than an outstanding idea in the possession of a person with only average ability.

So now we're a few years into ARD. This is where one of his few former students, and that's where he recruits a lot of people, they actually want to join. I thought it was interesting, his description. And this is, I didn't know at the time, I learned this later on in the book. This is Bill Elfers, I think. Elfers, I think is his last name. He's one of the founders of Greylock Partners, which is a venture capital firm that's still around. And he winds up founding it all the way back in like 1960s, 1965, somewhere in there. So this is what Bill said. It looked to me like an adventure.

It was a fragile company and we didn't have a lot of money. Says Bill ended up working for ARD for the next 18 years and I think he winds up being I want to say he's George's like second or third in command this is one of the talent very talented people that George loses because inability to compensate talent he's going through like all these fights with SEC at the time it's there's a crazy amount of detail in the book about that but this was funny um the struggle I really need to make sure i'm emphasizing for you like how difficult what he was he was misunderstood by everybody he had a hard time raising money he had to fight with regulators uh they had pressure because of the the structure of the business to

produce immediate profits which doesn't go along with new business creation normally right and so it says that but he he also he and then this is also going to illustrate like his personality. Like he's, he's really funny through all the ups and downs. George maintained his dark, his sense of dark humor. Never go into venture capital if you want a peaceful life. He warned a group of businessmen, businessmen in 1950. Keep on financing concrete that doesn't move, that doesn't call you at two o'clock in the morning to tell you about a new human accident. And this is an update. We're about five years into the business. So it's, you know, it's very

much like a take one step forward, two steps back, two steps forward, one step back kind of thing. By the end of 1951, combined sales of ARD's portfolio companies doubled to 40 million and total employment rose to 3,000 workers. They've made 26 investments at this point. And 21 reported profitable operations. And so you have a decent beginning, but then again, from the outside, everybody's misunderstanding this. So at the same time that their portfolio,

they're making $40 million in sales. They have 3,000 employees of all the portfolio companies. The Dow Jones average increased 14% that year, but the prices for ARD went all the way down to $19 by year end. People that had invested in the stock three years earlier were down 25%. So that's not where you want your investment to be. You've held the stock for five years and you're down 25%. George defended the firm's poor stock returns in his letter, taking issue with the way that ARD was being compared to an investment. His answer is investment trust rather. His answer was that investors needed to be more patient. The corporation

does not invest in the ordinary sense, he wrote. It creates. It risks. Results take more time and the expenses of its operation must be higher. But the potential for ultimate profits is much greater. So this is about and this is mentioned many times, like the counterintuitive nature of their work. Right. It is misunderstood by outsiders. I know I said that a lot. I have to like It comes up over and over again in the very beginning. And this is like the same thing, beginning of an

industry, beginning of an asset class, beginning of a company, which is what you and I have mostly studied. The beginning of companies are always going to be misunderstood, right? So it says, and don't worry about the company names here, their funding, that's not important. The growing success of Ionix and high voltage convinced ARD directors that early stage investments in technology companies represented its best opportunities. This is the counterintuitive part. The riskiest investments they were learning held the greatest potential to actually held, held the potential to generate the greatest financial returns and the highest personal satisfaction. It was quite a turnabout in ARD's thinking. After ARD invested in high voltage and

TracerLab, some of our friends began to say, oh lord, not another long hair project. Why doesn't ARD back something commercial and make some money? We learned our lesson. Now, this is the most important part, now we realize that our best things are longhaired. So internally, they're learning all these lessons, the counterintuitive nature of their work. Externally, ARD was clearly making progress, but investors still weren't buying the story. Much of Wall Street still viewed ARD as a freak philanthropic enterprise

dreamed up by a strange collection of Harvard professors and State Street financiers. Fortune magazine noted that skeptics, particularly stockbrokers, believe that this mighty aggregation of brains had brought forth a financial mouse. So main part of this is George not only having to maintain and manage the like the mindset of the people he's working with, he's got to do it for himself. He's got you know, he feels like he's making progress. No one's understanding.

It's taken years for him to explain this to people, so he's a little gloomy. George set down his thoughts on the state of the industry in his 1953 letter. His conclusion, venture capital is not fashionable. And this is where he talks about it. It's like people are too afraid of risks. They're not understanding this.

They're searching for security instead of hard work and daring up. They are searching for security instead of hard work and daring opportunities. And so there's a cyclical nature at this point. People stop, stop, uh, like they stop getting new, uh, new pitches says the deal flow, uh, it's deal flow was slowing to a trickle. Um, we do not know of any interesting new projects. George confessed. In a May note he left to himself. He often wrote notes or memos like this to clarify his own thoughts. And so this is the sad state of affairs. This is seven or eight years into his company and after the founding of ARD. ARD, their share price is just destroyed. ARD shares were so beaten down that ARD was no longer seen as a growth investment. It was a value play. So the only people thought it's like the cigar butt version of like the Buffett people that use the cigar butt method.

These are the people who are buying his stock now. It's like, no, it's not that you have growth, large growth in company earnings in the future. It's like, no, this is a value play. I thought that was funny. I mean, it's not funny at the time he's going to it, for sure. It's very depressing for him. But again, they're misunderstood.

They don't know. They're about to hit really hard. This is where they're going to, I want to say four or five years from now, this is where they hit their first home run. And I guess that is a good idea for you and I, the idea that the future value is most likely to be realized when it's misunderstood by other people and so at this point they're like okay this project isn't working out we should just sell um this is gonna give i'm gonna read the census to you because this gives you good insight into his personality his own treasure suggested that giving up they should give up and they should sell ard and this is george's response to this guy his name is ford uh says george wrote that ford was a weak and uninteresting man who never believed in ARD. So it's like, all right, you're on my team. We're good.

Oh, you go against me? You're weak and uninteresting. And you have no belief. And so now we're going to go. This is a summary that we're 10 years in. 10 years into his company. Ready? A decade after its founding, George had led ARD to a fairly successful record thanks to 10 years of trial and error.

ARD had begun to codify the principles of venture investing. It had nurtured several innovative and successful businesses, and it had found a way to deliver operating profit and a modest capital gain. But ARD had yet to fulfill its grander ambition of creating a venture capital community, nor had it produced a blockbuster company of stature and importance. But that was all about the change. And so this is where ken olsen comes in the beginning of digital uh equipment corporation i want to pull out a quote

from ken because i thought this was interesting so this is a great foundation for a company right so he says he's talking about his own motivation for what he's trying to do we felt electronics was going to revolutionize industry, right? So that's his reason for starting DEC. Think about it. A great foundation for a company that could be applied to other things. We felt blank was going to revolutionize blank. He filled in those two blanks with electronics is going to revolutionize industry.

But if you have this fundamental belief like Ken did, we felt blank was going to revolutionize blank. And so there's a description of like, what's Ken's doing at this point in his life. He's helping the US Navy, he's a student at MIT. But I want to pull this out because it talks about he was given an opportunity. So it says in 1952, Olson, a cocky 26 year old was asked to participate. So he's extremely blunt with his ideas, he pushes forward. Now that word cocky 26 year old was asked to participate so he's extremely blunt with his ideas he pushes forward now that word cocky is important let's go back to nolan bush now remember he started one of the if not the first one of the very first video game companies right and he talks about the

importance of being cocky perhaps everyone has creative potential but only the arrogant are self-confident enough to press their creative ideas on others. Why is he bringing that up? Because he was a mentor for Steve Jobs. He hired Steve Jobs at 19. Steve Jobs starts Apple at 20, if I'm not mistaken. Let's go back to the full quote. Perhaps everyone has creative potential, but only the arrogant are self-confident enough to press their creative ideas on others. Steve believed he was always right and was willing to push harder and longer than other people who and this is the important part who might have had equally good ideas but who caved under pressure steve is not one to cave under pressure ken is not one to cave under

pressure talks about ken this and then the north myself here is like this makes sense why george would want to back him because they think similar similarly excuse me so it says olsen despised the organization man with his perfectly trimmed hair and his immaculate gray suit he's talking about like people working at ibm and large corporations this time and his neat suburban track house he believed in the individual engineer and in collaboration with small teams of colleagues that quickly develop products that change the world. George has that same belief too. And so what Ken is going to do, he wants to launch a computer company that is going to make machines that were cheaper and easier to build and use than the expensive IBM mainframes of the day, which had almost like

complete control of the market. And so it was funny to me at this point, he's helping staff DEC2. One of his former students comes to him, Johnson, Johnson. Johnson had two other offers, both for more money,

but he visited George to see what he thought about the job. You're a Scandinavian, aren't you? Asked George. Yes, replied Johnson. Scandinavians work very hard, replied George. I could use another hardworkingavians work very hard, replied George.

I could use another hardworking Scandinavian because that's what Olson is. You do that. You work for DEC and you make them work hard as hell. And so, again, we see the importance that that George puts on work ethic. This is very interesting to me, the predictable response about of humans. So he's trying to make a more personal computer, Olsen, that is. And he's told, you can't do this. Computers are not a toy. We've seen this before.

Olsen wanted to liberate computing from the tyranny of the elite. The concept of an interactive computer was strange. Some people thought it was wrong. Computers are serious. You shouldn't treat them serious. You shouldn't you should you shouldn't treat them lightly. You shouldn't have fun with them. How ridiculous I mean, think about the world we live in, right? How ridiculous the sentiment is. And they're telling him this time. And again, this is why it's so important. Because like, go back to Nolan Bushnell,

like cocky people are able to push their ideas, they're not going to let you they're not going to give up in the face of, you know, people telling them don't do this. You shouldn't have fun with them. They shouldn't be exciting. They should be formal and distant with red tape involved. That is a quote from Olson about what people told him. Another maxim that spreads throughout the book, one of Detroit's or one of Georgia's maxims was you should always raise money when you don't need it. Having learned through hard experience that when you do not need money or when you do need money, chances are you are unlikely to get it. This is very similar to the few lessons from Warren Buffett we just went over. He says the most attractive opportunities may present themselves at a time when credit is

extremely expensive or even unavailable. At such a time, we want to have plenty of financial firepower, which means plenty of cash. So this is a quote I want to bring to your attention about somebody that works at ARD for George. So it says, George was head of it, and he was more than anything else a teacher. He said, he was in the business to test a thesis. Making money wasn't really a very high objective. He wasn't opposed to it, but the salaries were modest. There was no ownership in the company for anybody. There was a missionary zeal about it. That's how George got away with underpaying us all, because we believe we were doing something for the greater good, that we were making America a better place. And I just want to bring to your attention again, this is yet another historical individual, somebody who led a remarkable life where they

thought of themselves as a teacher. We see this over and over again, whether you're an investor, founder, whatever the case, they talk about, I'm a teacher. That's how they describe themselves. Let me give you a quote from the founder of Costco, Jim Sinegal. If you aren't spending 90% of your time teaching, you aren't doing your job. So that's his quote, right? Let me give you another quote. His mentor, the guy that he, Sol Price, the most influential retailer without a doubt that's ever lived, right, was Jim Sinegal's mentor mentor in the biography I did on Sol Price. Jim Senegal wrote the foreword to the book.

He's also in the book because he was a mentee of Sol Price. He's giving an interview much later when Costco's already successful. They're like, oh, you've known Sol Price for a while. You must have learned a lot from him. And he's like, no, that's not accurate. I didn't learn a lot from him. I learned everything. Everything I know came from Sol Price.

And what did Sol say? You train an animal. You teach a person. And so we see this over and over again. You teach, teach, teach. And a lot of that is, that's why I say over and over again, repetition is persuasive.

You read these books and it's like, they have a philosophy, a way they want the people that they're leading to think. And they repeat that over and over and over again. They stick to these ideas for decade after decade. So now moving ahead in the story, we're about 15, 16 years into the founding of ARD. He's going to give a speech. This is where the, why am I stuttering? The title of the book, excuse me, comes from.

So it says he traveled to Illinois where he delivered an extraordinary address. So he's talking to a bunch of security analysts and he titled the address Creative Capital. The more insightful part of the talk focused on George's explanation of ARD's investment philosophy. And this is what he said. The first tenet was that the riskiest part of the spectrum has to date proved the most rewarding and the greatest capital gains have been earned in companies which were started from scratch second most venture investing has not been built on achievement of dramatic overnight successes but on the steady growth of soundly based well-managed affiliates so they reference portfolio companies as affiliates that's the word he used to use. And that's what he kept talking about. He's like, listen, yeah, we're a public company. You want me to make money this quarter? It's like all the money is in the future. It's not built. It's built on the achievement is built not on dramatic overnight success, but on steady growth

over a long period of time. Third, technology has proved a rewarding field for American research and is particularly well suited for creative capital investment. Why? He says the reason in specialized technical areas with products protected by patents and know how it is easier for small companies to compete with large organizations. I think a lot of people probably still believe that, but he's saying that in 1961. Then he goes into what is his role? What is his contribution on all this? He says his biggest hurdle was usually convincing these small yet proud companies that they needed outside help. George didn't hold that against him. He knew that if entrepreneurs weren't self-driven and a bit egotistical, they would be punching the clock for IBM or General Electric. So he has a fundamental understanding of the mindset of the entrepreneur, of the person he's working with.

That's extremely important, right? He's like, listen, I don't hold that against you. I know you're a little cocky. You're driven, a bit egotistical. And if not, you'd be working at a big, stodgy company. You wouldn't even be interested in starting a company. You have to be somewhat crazy to want to start a company. The general closed his lecture by stressing the importance of management assistance in the venture business. There is always a critical

job to be done. There is a sales door you can open, a credit line to be established, a new important employee to be found. So he's talking about all the stuff that he's helping his companies do, right? Or a business technique to be learned. The venture investor must always be on call to advise, to persuade, to dissuade, to encourage, but to help build. Then, and he's talking about if you're doing this, then venture capital becomes true creative capital, creating growth for the company and financial success for the investing organization. And so this is also, I think, one of the benefits and what I was trying to explain to you earlier, or maybe at the very beginning is the fact that you may have a belief about something that's misunderstood by outsiders, but like George had

a fundamental belief in what he was doing, right? He's like, this is a great opportunity. This makes too much sense. We have to do this, right? And for a decade and a half, people are not understanding. Eventually they come, they agree, but they agree later, right? And what was fascinating to me is, so ARD was majority owner of DEC, right? So Digital Equipment Corporation, this gigantic multi-billion dollar company that's going to happen. They own like 70% of the company, something like that, right? And they could have sold out for quick guaranteed profits and george rejected every off offer and so like you have huge companies trying to like

xerox comes to him uh hp he was a packer comes to him all these other firms are like hey we want digital we want to but like just book this profit dude give us give us this company what are you doing like just take the money and run and ge George is like, no, he said, no, he rejected literally every single offer and his, his bet. He's like, well, I think the company could prosper on its own. It doesn't have to be a part of a, of a larger company. And he, the reason I bring this to your attention now is because when he's saying that it's like, it's not at all certain that he's correct. And so this is Ken who, you know,, it's like, it's not at all certain that he's correct. And so this is Ken who, you know, George could have just sold Ken's company out from under him.

And this is what Ken said. He's like, listen, ARD wouldn't buy and sell companies at the first opportunity. This sounds obvious, but it's very hard for someone who owns a major part of the stock to be patient. The general really preached this and he, and more importantly, he really practiced it. And so there's two ideas that came to my mind when I got to this section of the book. So sometimes I look back at some of the books I read, and I'm like, man, I don't know if I should do books on entrepreneurs that are still active, right? Like, maybe that's so premature, like, maybe we should just focus on people that are very close to retirement or dead, right? And so a long time ago, I read a book on the early days of Snapchat. And now in hindsight, I'm glad I did because we see like what happened there. And so

when I get to this section about like George making a really smart decision by not doing something right. And then you look at like Evan Spiegel's decision, like he had the opportunity, like how it's so bizarre to me and admirable right because i i probably would have sold um if i was in his shoes like you compare like the two different paths of instagram and and snapchat right nothing wrong like i'm not poking fun at anybody because i'd put like i think the main founder of snapchat or excuse me um instagram i think it's kevin i think they sell for what a billion dollars i think he wants into getting $140 million. I don't know how old he was at the time.

I don't know, 30 years old, something like that. In hindsight, I was like, oh, can you believe? It's funny because at the time, it was like, Mark Zuckerberg is insane. He's spending a billion dollars for his company. He's not generating any revenue, right? Now, if it was spun out by its own, it's what, hundreds of billions? What is the value? A lot more than a billion, whatever number you want to put on it we can all agree on that so you criticize mark for doing it at the time and then everybody's like yeah good for you kevin now it's like oh kevin sold and you

know you can't listen to outside people but go he left so much money on the table yeah but how hard like think about you're 30 years old right you're not rich by any means i don't think he came you're wealthy obviously at that point he's like somebody's offering to give you money like you're set for life that's extreme i'm trying to set this up to realize how difficult it is to do and so kevin you know winds up losing control of his company later on gets 140 million i'm not gonna hate on the dude i i'm doing the same i'm most likely making that same decision right even if people think it's a mistake in hindsight and maybe if you have just like this fundamental love let me go off on a weird tangent i had at dinner last

night too we were talking about people that love what they do and i was like you know what i have a weird thought um that's been coming to my mind lately about maybe we don't actually know that right definition of love what you do and they're're like, what are you talking about? I was like, well, if like the person you're talking about, you say they love what they do. There's a price, right? That you could pay them that they stopped doing that. Right. And they're like, yeah, I was like, I never thought about this too before. So before I started reading all these books, but I'm like, if you truly love what you do, and if you want to, this is like an extreme mindset. I'm not saying this makes sense for everybody, but like, if you truly love what you do, and if you want to, this is like an extreme mindset. I'm not saying this makes sense for everybody.

But like, if you truly love what you do, there's no amount of money that somebody could pay you. Like, how much would you have had to offer Steve Jobs to sell Apple to you? The answer is nothing. All the money in the world, that dude is not selling Apple. How much would you have to pay Warren Buffett to not work at Berkshire? Well, he's worth what? I don't even know how much. Billions, like billions

and billions of dollars. He's in his 90s, still going to work. That is how you know that you love what you do. So anyways, that just happened to be a conversation I had last night.

It's also, I think, influenced by some things that I thought about when I was reading this book. So let's go back to this. It's like, okay, so that's the route that Instagram chose.

And then you look at like, still a young kid in in his twenties. I forgot how old he was, right? Evan Spiegel, Mark Zuckerberg comes to you to say, I'll give you, that's a nice little app you got there. Nice little company. I'll give you 3 billion for it. And you ghost them. You ignore them. You're like, no, I'm not selling it. And so in that book, I think it's called How to Turn Down a Billion Dollars. It says Evan was obsessed with Snapchat being a permanent company. And he said it was his best idea that he'll ever have, and he's not going to sell his best idea to anybody else. And then also in that book, what I found interesting that you learn is who were Evan's two heroes? Steve Jobs and Edwin Land, both of which would, there's not a dollar you could have paid Edwin Land to sell Polaroid. There's not a dollar you could have, you could have paid Steve Jobs to

sell Apple. So how the hell did this young kid have such a sophisticated understanding of that, right? And what's the result? So the note I left myself on this page is, is Evan, that came to mind when I talked to, when, when it talks about George is not selling DEC, right? If is Evan Spiegel's decision not to sell to Facebook, is it not one of the greatest investment decisions of all time? It has to be. And so that leads me to my second note. I've described to very few newsletters. There's one that I do like a lot because it's so eclectic and bizarre, and it's actually free to read. It's called, you can go to libertyrpf.com, libertyrpf.com. And I've read this quote in his newsletter. And do you know who Nick Sleep is? I didn't know who

he was. Liberty's like an investor. He just curates a lot of interesting ideas. And so I learned a lot from reading his newsletter. Anyways, he had a quote about Nick Sleeps, this prolific investor. I think he had like a decade where he returned like a thousand percent, something like that. Right. And so Nick Sleeps said something that was fascinating that ties together what happened with George and what I just said about Evan. He says the best investors are not investors at all. They are entrepreneurs who never sold. Okay, so let's move on. This is, again, another, I think one of the main points here is just the

fact that like the way if you have a fundamental understanding of your company, what's happening, it's always better to go with what you think than what the external world says. And in this case, he winds up in, in unfortunately the part of the external world is just regulated it's just hammer hammering them um i'm laughing it's definitely not funny if you were georgia this time uh he feels like he's finally getting some kind of validations because they just hit real hard on dec and um yet even if investors his stock starts rising that causes the sec to not think venture capital. It's such a weird dichotomy here that to think venture capital is not that important.

And he says there, meaning the SEC's lack of appreciation for the importance of venture capital was driving the general mad. He was always going were lowering the boom on ARD just as investors and economists were beginning to recognize the significance of George's achievements. So now he had to fight the complete indifference of outside investors before. It takes a decade and a half. And then they're like, oh, wait, this guy's actually right. So then they come around to him. And as they come around to him, the SEC says what you're doing is fundamentally not valuable, and it's violating all these regulations, and we're going to hammer you.

And so it's because of all this, his hands are tied, and all this red tape with the SEC, he just loses all of his talent. This is where his second-in-command leaves. One, because they realize, hey, this guy's not going to retire, so I can't take it over. But also they realize that they have to improve the structure of these. It has to be a partnership. Right. And because this is the example where some of them, you know, in the case where they're financing entrepreneurs, companies, entrepreneur has stock in the company, makes a ton of money.

The SEC is like, it's just I'm not going to cover the weird rules because they don't make any sense to me at all and obviously they've been since changed and even the rules that weren't changed they figured out a way to get around them with the different structure but really the point of like reading this is like we do have to learn from the mistakes of other people like we need these saccharine like george's incense like this sacrificial lamb he didn't know when they set up the company this way that this is going to 20 years in the future is going to cause him to lose all of his talent uh so it says this is going to, 20 years in the future, is going to cause him to lose all of his talent. So it says this is where Bill Elfers leaves, starts his own company. There was one more reason Elfers left.

He realized, along with an increasing number of investors in new companies, that venture capital and the stock markets mixed as well as oil and water. Elfers could see the government's increasing interference with ARD's affairs was not going to end. The SEC's letter challenging ARD's practices was received by ARD a week before Elfers resigned. And so Elfers comes up with a solution for this. He says, for Elfers, the solution to many of ARD's problems was to take advantage of a new organizational form, the limited partnership. Although it might be too complicated to convert ARD into a partnership, it was not too late for Elfers to form his own. He would not be the first person to realize the advantages of such a structure. So there's some other people in California doing the same thing. In 1961, Arthur Rock, who was then an investment banker and a student and a previous student of George

when he went to Harvard, formed Davis and Rock, and he adapted the old oil wildcatting business. That was interesting. The Big Rich, I think it's founders number 149 if you want to learn more about that. Adopting the old oil wildcatting business. The limited partnership offered several distinct advantages over the publicly traded investment company. So they're talking about the difference

of what the people that came after George did that improved on what the mistake George made, but George didn't know his mistake when he made it, right? So it says they had distinct advantages over the publicly traded investment company. General partners who ran the firm received not only a management fee that covered salaries and expenses, which George had to figure out through operating profit, right? They also received a share of the capital gains that feature eliminated ARD's compensation problems, which led

to obviously everybody leaving. You're not going to have talented people stay if they can't be paid well. The firm's limited partners also maintained a long-term horizon that allowed them to forego dividends or interest payments. But this is the important part that overall his thesis was correct. It was really mind-blowing that you could take a small amount of seed capital and get ownership of a company that was worth more than IBM in a fairly short period of time. During the course of its existence, ARD financed 120 companies, but it was the development of digital equipment that allowed George to accomplish his ultimate goal. George was very important because he was the first one to believe there was a future

in financing entrepreneurs in an organized way. And I'll end with some highlights from a speech that he gave when he retired. There's two ideas here for you. Here's the first one. Remember, and this is really important, remember that our happiness is in direct proportion to the contributions we make. In other words, how we serve other people. And then he ended his speech with one of his favorite stories. On a road somewhere, three men were breaking stones. They were asked what they were doing. One said, earning a living.

Another said, I break stones. And the last one said, I help build cathedrals. Let us build cathedrals together. And that is where I'll leave it for the full story. You got to read the book. If you want to buy the book using the link that's in the show notes in your podcast player, you'll be supporting the podcast at the same time. If you want to support a friend and the podcast at the same time, there's a link below where you can buy a friend, a gift subscription to Founders, one that never expires.

So they have access to Founders for as long as Founders exists. There's a link below for that. That is 203 books down, 1,000 to go. And I'll talk to you again soon.