The reality that Doriot’s company faced from 1959 onward was that a new organizational form–the limited partnership, born in Texas’s oil-wildcatting industry–was being adopted by newer VC firms. Ante quotes a former ARD executive who recalled that after he supervised the IPO of one portfolio company, the net worth of that company’s CEO “went from 0 to $10 million and I got a $2,000 raise.” A VC limited partnership, by contrast, gave its general partners not just management fees but also portions of its capital gains; additionally, it permitted profits to be passed on to its investors without incurring corporate taxes, and it mandated that limited partners stand clear of management. Small wonder that when Perkins helped found Kleiner Perkins Caufield and Byers in 1972, it was as a limited partnership. When Doriot finally accepted the SEC’s intransigence, he deemed ARD “not competitive anymore” and sought the merger with Textron.
Similar disagreements continue between government and industry. After the dot-com and telecom crashes, Washington passed the Sarbanes-Oxley Act and new accounting rules for expensing stock options, despite the predictions of many technology executives and VCs that regulation would undermine innovation. John Doerr at Kleiner Perkins, for one, believes that that happened: ”Sarbanes-Oxley did have some chilling effects on technology startups in terms of the cost of being able to go public.”
What verdict should we award Doriot and ARD? David Hsu, a professor of management at the University of Pennsylvania’s Wharton School, says that while ARD suffered from fatal organizational flaws, it made a lasting imprint on the practice of venture capital. Indeed, writes Hsu in a paper he coauthored, by the time Doriot sold the firm to Textron, “venture capital had become a part of the economy, and ARD simply slipped out of existence with its historical mission accomplished.”
Mark Williams is a contributing editor to Technology Review.