Receive the Bulldog Edition


Economic Blogosphere

Economic Journalists


economicprincipals.com banner

December 6, 2009
David Warsh, Proprietor


| contents |

The Visionary

Among the relative handful of disappointments in Peter Brooke’s charmed life appears to have been his inability to persuade Harvard University to confer an honorary degree on former British Prime Minister Margaret Thatcher. In a new book, A Vision for Venture Capital: Realizing the Promise of Global Venture Capital and Private Equity, Brooke writes, “It is hard to describe how quickly attitudes changed in Great Britain in the wake of the Thatcher Revolution. It was as if an oppressive shroud had been removed.”

Unsurprsing, I say. Too much to argue about. The university didn’t honor Deng Xiaoping, either, and he did more or less the same thing for China. It’s Brooke himself whom Harvard should encowl, as the leading pioneer of Boston’s venture capital industry, splendidly resurgent in the years after World War II.

Of course New England businessmen were scrambling up “the value chain” for three centuries before the term would be invented. None knew where it led. But from cod to candy, from slaves and opium to ice and stone, from railroads and telephones to electricity and radio, merchant traders and manufacturers in Boston understood that the essence of competitive advantage was that it didn’t last.

When textile and shoe manufacturing firms began moving south and overseas after 1890, Boston was left flat for a time. By the 1920s, the city had become a famously backward-looking town. Then World War II pumped millions of dollars into its universities and research labs and gradually the region came back to life.

Harvard Business School Professor Georges Doriot (it was General Doriot to all and sundry, for having gained the rank in the quartermaster corps of the US Army during World War II) was the first Boston venture capitalist, a lonely voice in the early 1950s when he urged his students to read every page of every issue of Scientific American. The firm he founded in 1946, American Research and Development Corp., had only one big hit before it sold out to Textron in 1972 – it launched Digital Equipment Corp., the minicomputer manufacturer that spawned the real-time computing industry and gradually led the way towards the invention of the personal computer. Doriot’s prize pupil, William Elfers, had started Greylock Partners in 1965, Boston’s next significant venture lender. And when the rebellious Brooke started TA Associates in is 1968, it was Elfers who showed him how to write a limited partner agreement. (Arthur Rock, an early West Coast venture capitalist who put both Fairchild Semiconductor and Intel in business, was another Doriot pupil.)

But Brooke had conspicuously walked out on one of Doriot’s lectures; he was too busy coaching football and lacrosse, he explained to the unsmiling French general. Instead he learned the start-up business as the high-tech lender at the First National Bank of Boston (FNBB), then the thirteenth largest bank in the US. He had apprenticed himself to the legendary Serge Semenenko, a White Russian refugee who had discovered that it was possible to make good money with little risk by lending to Hollywood filmmakers against theater-owners’ box office receipts. It was only a short step from there to lending to firms with new technologies that enjoyed a dependable stream of government grants and contracts. Soon Brooke was FNBB’s high-tech lender. When after a few years he left to join Bessemer securities in New York, it was Thomas Lee, today a leading buy-out chief, who replaced him.

Bessemer was Brooke’s first taste of real venture lending. The Phipps family’s investment arm, Bessemer was one of a handful of wealthy family offices given sums of money to invest in hopes of duplicating the founders’ success, this time in some new industry. (In the Phipps’ case, the original fortune was Pittsburgh steel.) “Room 5600” – an entire floor of New York’s Rockefeller Center given over to advancing Rockefeller family interests – was the best known of these. Brooke stayed long enough to score some successes, but knew he wanted to move back to Boston to strike out on his own.

“It the late 1960s, telling someone that you were a ‘venture capitalist’ usually provoked just blank stares,” Brooke writes, “even though by this time high-tech companies were accounting for almost ten percent of total employment in Massachusetts.” He hired a string of young men – Kevin Landry, who would become his eventual successor, was practically the first – and together they began beating the bushes. They found plenty: successes like Wang Labs, Federal Express, Continental Cablevision and Biogen and occasional disappointments, too. By the end of the 1970s, business was booming, thanks partly to a big cut in the capital gains tax, and some of Brooke’s young men were leaving the firm to hang out shingles of their own. Among those who stayed was Jaqueline Morby, a gifted software expert and one of the first females to crack what had been a male-dominated world.

The real drama came in the early 1980s. That was when Brooke decided that the next big development in venture capital would be its globalization – first in Europe, then in Asia, and eventually, all round the world. Initial successes in France and Great Britain buoyed Brooke, but he was unable to interest his partners in pushing ahead. Corporate restructuring was the new game in town; “private equity,” buying and selling (and often merging or closing) big pieces of well-established businesses, were the coming things. TA’s partners were unwilling to go abroad when there was so much easy money to be made at home.

So Brooke split from the company he founded, and formed Advent International instead. New partners, new structures, new opportunities were necessary. World trade was opening up. Before long he had another rapidly growing business. There was a certain amount of hurt feelings on both sides. At one point Brooke announced that venture capital had progressed “from infancy to senility” in just fifteen years. But the real sorrow had to do with forgone opportunity. TA might well have gone on to become as powerful a private equity player as Blackstone Group or Carlyle Group, Brooke says, if it its partners had stayed together.

 To see Brooke clear it helps to think of him in opposition to Tom Perkins, who is in many ways his West Coast counterpart. The two men were born little more than a year part: Brooke in 1930 in Worcester, Mass, Perkins in 1932 in White Plains, N.Y. Brooke graduated with a degree in history from Harvard College in 1952, Perkins in electrical engineering from the Massachusetts Institute of Technology in 1953. Both were excellent athletes: Brooke played team sports and Perins swam. Both attended Harvard Business School (though not at the same time, for Perkins worked as an engineer for or a couple of years first); neither one took much of a shine to General Doriot. Both became premier venture capitalists.

Perkins packed off to California, got a job with a little start-up called Hewlett-Packard, worked on lasers and, in 1972, founded Kleiner, Perkins, Caufield and Byers, which quickly became one of the two or three top venture firms in Silicon Valley. In 2007 he published Valley Boy: The Education of Tom Perkins, patterned loosely – very loosely – on The Education of Henry Adams. In it he describes his marriages; the first, of thirty- five years, to a remarkable Norwegian woman, who died; the second, to the novelist Danielle Steele; his enthusiasm for Bugattis, Ferraris and McLarens, and for ocean racing; the circumstances surrounding his awful practical joke, Sex and the Single Zillionaire: A Novel; his duels with Carly Fiorina and Patricia Dunn over the governance of Hewlett-Packard; his friendship with the novelist Patrick O’Brian (Master and Commander), and much else. It is a deeply interesting and entertaining book by the only child of a distant older father who had been a stellar athlete when young and who showed little interest in his son’s intellectual gifts.

Now Brooke has a book, too (extremely ably written with the assistance of Daniel Penrice, of the Winthrop Group). About the only salacious thing in it is an aside about how Semenenko would occasionally rent an enormous yacht for his clients and include among its crew a number of off-duty starlets. But Brooke’s book is equally interesting, about, for instance, about the difference between Boston and California. East Coast lenders didn’t know much about technology, at least in the early days; they were generalists, not technologists. They took a portfolio approach, emphasizing diversification and limited appetite for risk, preferred companies that had a revenue base and were moving towards profitability. The West Coast guys were not averse to supplying seed capital and early stage financing, all part of the pioneer spirit. “They were good at what they did, and gained an edge that they have never relinquished.” That said, Brooke continues, technological savvy will take an investor only so far. It’s still essential to know how to identify market opportunities, size up entrepreneurs and develop relationships “in which information and ideas flow freely.” These skills are not easy to acquire, he says, but those who possess them can add substantial value, “even without knowing everything there is to know about a particular product or technology.” Harvard and MIT: it was ever thus.

The whole second part of Brooke’s book is an extended meditation on changing styles of venture finance, meaning mostly startups, usually high tech firms, and private equity, meaning restructuring large public companies through buyouts. The same skills are required at either end of the spectrum, he says, but emphases differ. On the manner in which today’s financiers have insulated themselves from risk at the expense of their investors, he quotes Perkins approvingly: “Today I stand in awe of the way the managing partners of some of the huge buyout funds reward themselves; fees for raising the fund, fees for managing the fund, fees for doing the deals within the fund, and profit participation for individual investment, whether or not the overall profits are achieved.”

What’s all this got to do with the people who read Economic Principals? Every once in a while, the online EP shows its roots as a Boston newspaper column. In the early 1950s, when Brooke and Perkins passed through it, Harvard Business School was a hotbed of entrepreneurial research, led by Arthur Cole. Joseph Schumpeter, who had spent much of his time there during his last years, had died not long before. But many young scholars all around the country were preparing to take up where he left off, all with good results: Jacob Schmookler, F.M. Scherer, Richard Nelson, Nathan Rosenberg,Alfred Chandler and Thomas Hughes among them.

It is arguable, however, that none of them (nor even all of them together) contributed as much to our knowledge of economic growth – where it comes from, why it happens, why it sometimes stops – as practitioners like Brooke and Perkins. That makes their books especially worth knowing about.

| contents |


Skim past columns here.


Support Economic Principals by subscribing to its bulldog edition—receive the weekly via email a day before it is posted on the Web, and, as well, a quarterly Report to Subscribers.

To reach the proprietor, ask a question about the website or report a problem email warsh@economicprincipals.com.

Camisetas de fútbol baratas camisetas fútbol camisetas futbol Réplicas camisetas de fútbol Camisetas futbol tailandia Camisetas nba baratas nike air max pas cher nike tn nike air jordan nike free zapatos deportivos baratos