The idea of starting a company and finding risk capital to support it was a difficult concept to grasp when Georges Doriot went from France to America before the Second World War.
Doriot applied his managerial teachings at Harvard to US Army logistics during the war and then set up and ran American Research and Development (ARD) – the first successful VC firm,which backed computer companies such as Digital Equipment Company. (For a great biography of Doriot read Creative Capital by Spencer Ante.)
A classic Doriot maxim quoted by Ante is: "Always remember that someone, somewhere is making a product that will make your product obsolete."
The current patterns of change, where successful products can tap a global audience quickly and relatively easily, makes the barriers to competition entering other markets and undercutting established firms easier to circumvent.
As Ross Levinsohn, chairman of Tecca and managing director of Fuse Capital, the VC firm backed by retailer Best Buy, said as the latest round for the personal electronics shopping and information service was announced: "The speed at which technology evolves affects everyone. We repeatedly hear that constant innovation is overwhelming for consumers, who struggle to keep pace."
The consumer sector is perhaps at the forefront of the seismic changes affecting all industries, and a response is the increase in the number of companies, such as Unilever, Nike and Adidas, setting up or expanding their corporate venturing units.
The pace of change is also potentially overwhelming for VCs. The educational organisation Kauffman Foundation said 16% of the fastest-growing companies had received VC backing between 1997 to 2007. However, the Kauffman report was titled "Right-sizing the US Venture Capital Industry" and said the industry would shrink to half its size.
This would take it back towards the scale more common during Doriot’s days – in 1978 there were 23 VCs managing $500m.
Growth for US VCs came after lobbying of US politicians to cut capital gains tax and encourage pension funds to commit to funds through amendments to the "prudent man" rule. By 1983, 230 VCs managed $11bn, a third of which came from pension funds.
Now, the pressure is back on politicians to increase taxes while still encouraging entrepreneurialism, a form of self-actualisation on the increase due to cultural and other factors. This dichotomy comes as pension funds and life assurers are expected to be less likely sources of long-term capital, according to an influential report by the non-profit World Economic Forum.
Finding alternative sources of long-term capital, such as family offices, angels, sovereign wealth funds, governments, endowments and foundations, will help entrepreneurs source their risk capital.
Corporations should be another natural provider of long-term money, provided their own shareholders are prepared to see cash reinvested for the business’ longer-term health.
However, it is less certain that these long-term sources of capital will choose 10-year, limited liability partnerships as a structure through which to invest.
The forum’s report dissects the principal-agency issues that can flow from the providers of capital searching for long-term investments being managed by groups paid on a shorter-term basis.
John Kay, a columnist at the Financial Times, three years ago calculated that if Warren Buffett, head of conglomerate Berkshire Hathaway, had managed the company as a private equity firm taking 2% annual management fee and 20% of profits as a performance charge, then $57bn of the $62bn earned over the previous 42 years would have gone to him. However, finding a measure of independence and using the governance structure of VC firms is helpful.
In Ante’s book, after the merger of ARD with Textron, is the quote: "Any entrepreneur didn’t want to work for a flunkywho had to go back to the parent."
The point was to have freedom to provide funds for portfolio companies and certainty they would be available when needed. This balancing act remains an issue before corporate venturing can be successfully deployed on a wider scale.
Doriot’s vision helped make business management more professional, and the tools of support for entrepreneurs more achievable.
Whether creative capital reaches new heights compared with the past 20 years will depend on forces beyond the venture industry’s immediate control and, crucially, the ability of corporate venturing units to learn from the past.