In Memory of Ken Olsen

Ken Olsen, the cofounder of Digital Equipment Corp, died last week.

The story of Olsen and DEC formed the heart of my book Creative Capital. I’ve been meaning to get around to publishing a blog post explaining why Ken Olsen still matters.

In the meantime, here are some of the best links to obits and memorials of Olsen, who Fortune magazine in 1986 called “America’s Most Successful Entrepreneur.”

Ken Olsen, Who Built DEC Into a Power, Dies at 84 by Glenn Rifkin of The New York Times

Innovator’s Dilemma by Steve Syre of The Boston GLobe.

Remembering Ken Olsen by Paul Kedrosky of Bloomberg BusinessWeek

Remembering Ken Olsen by Bruce Richardson

Ken Olsen Memorial by John Furrier of Silicon Angle

Obit by IDG News Service

Obit by Chris Mellor of Channel Register

Memorial by Robert Lenzner of Forbes

Obit by Gregory T. Huang of Xconomy

Memorial by Gordon Bell on Xconomy

Deadly sins the tech industry can’t seem to shake by Bill Snyder of Infoworld

New Memoir from Computer Visionary and DEC Cofounder Harlan Anderson

Digital Equipment Corp. cofounder Harlan Anderson, who just turned 80 this month, is publishing his memoirs next month, reports Scott Kirsner in this column.

The book is called Learn, Earn & Return: My Life as a Computer Pioneer, and is being published by Locust Press. And Anderson has also started blogging recently.

(The photo above is of Anderson’s “Employee #2” badge from DEC, which appears on the book’s cover.)

In the book, Anderson writes for the first time about his experiences at DEC during the company’s initial decade, and the events that led to his leaving in 1966 — the same year that DEC became one of the most profitable initial public offerings in Wall Street’s history. Anderson is candid about his relationship with DEC co-founder Ken Olsen: and later, how Olsen’s autocratic leadership style alienated some of the company’s most talented engineers, and ultimately contributed to Anderson’s departure.

He also discusses how American Research and Development, the venture capital firm run by Georges Doriot, financed this groundbreaking startup.

When Digital first took money from American Research & Development, Anderson writes that ARD invested $70,000 for seventy percent of the company. “This deal seems ridiculous and unfair by today’s standards; however, we never contacted an alternative source of capital,” Anderson writes. “We were very naïve and there was very little venture capital money available then. We accepted the offer without any negotiation.” (In the photo is Anderson, sitting in front of Digital’s PDP-6 computer, with Georges Doriot, the founder of ARD.)

Congrats Harlan!

Are VC Returns Unfairly Judged? Why Fred Wilson is a Great Host & Thoughts on Doriot Quote du Jour

For the last six days, Fred Wilson has been posting a Doriot Quote of the Day. It’s a new addiction of mine to see what quote Fred comes up with each day. He’s picked some of my favorites and surprised me some other times.

Like today, Fred quoted me! Here’s the snippet from Fred’s blog A VC:

“Thanks to Digital Equipment’s blockbuster IPO, ARD met Doriot’s goal of generating superior performance by producing a 17 percent rate of return during its twenty-one year history, a significantly better return than the 13 percent average of the Dow Jones index during the same period.”

This is not a Doriot quote either. In fact, it’s not a quote at all. Spencer Ante wrote this. The reason I posted this is that I think the expectations for venture capital have been skewed by several periods of strong returns (the late 90s in particular). Over the long haul, I think VC should produce high teens/low 20s returns after fees and carry. The 17 percent number that ARD delivered seems about right. You have to remember that 17 percent over twenty-one years is 23x the initial capital invested.

So far, the post has generated 13 comments.

One reader Mats Myrberg asked:
17% over 21 years is really an incredible record. If you take out the DEC IPO what does the record look like? Also is there historical data on VC funds (and managers) and their return rate to give this more context? This would be interesting data.

Good question, Mats. As Fred says, VC is a business based on the long ball. If you strip out DEC, ARD’s 25-year rate of return was 7.4%, according to a report by Patrick Liles that I sourced in the book. It’s 25-year rate of return was 14.7%.

Here are the rest of the return figures for ARD. As you can see, ARD reached its peak return as an independent firm in 1969 when it hit 17.9%. I bet if you held onto your portion of DEC shares, that return would have gone even higher, above 20%, because DEC continued its spectacular run for another 10 years.

1966 9.5%
1967 16.7% (this is the figure that Fred referenced in his original post, one year after the DEC IPO super-charged ARD’s portfolio)
1968 15.5%
1969 17.9%
1970 14.9%
1971 14.7%

One final thought: As the NYT review pointed out, Doriot’s “genius was to coax investors to wait through years of uncertainty.” Consider this: ARD did not generate a positive return on its original $3.5 million investment fund UNTIL ITS EIGHTH YEAR!!! And even then the return was a paltry 1.5%. It was not until 1959 that ARD started to generate returns in excess of 5%. And it never reached a double-digit return until 1967. So you gotta hit that home run to outperform the market.

BusinessWeek Online Publishes Web Video Interview About Me & Creative Capital

Hey folks, some more good news on the book front. My marketing juggernaut continues to chug along. Today, BusinessWeek Online published a video interview of me talking about my book and Georges Doriot. My colleague Catherine Holahan conducted the interview. Thanks BW!

In the interview, I talk about what inspired me to write the book, how World War II spurred the creation of venture capital, how Boston gave birth to the VC movement, the special relationship between Georges Doriot and DEC co-founder Ken Olsen, and the future of the VC industry. Hope you enjoy it.

Boston Globe Video on Doriot and ARD

In connection with his forthcoming story on Creative Capital in The Boston Globe’s Sunday’s Business section, Globe columnist Scott Kirsner produced a video about American Research and Development and one of the entrepreneurs ARD backed: Adage’s Tom Hagan. Adage was a Cambridge electronics company. Check out the video here.

It’s a pretty interesting interview in which Hagan praises Doriot and ARD for inventing modern venture capital. “His whole approach was finding people who wanted to build a business, rather than finding a quick road to riches,” said Hagan. “What ARD did was create a channnel for old line New England money into these new ventures, which were started in many cases by young technologists who otherwise had no entree to that money. It was a very signficant thing they did. A lot of people don’t realize how staid and stodgy Boston was at the time.”

But on the other hand, Hagan argues that ARD retarded the growth of the New England venture communtity. His thesis is that by only investing $70,000 into Digital Equipment Corp., ARD created the impression that startups did not need a lot of money to build a business.

“The venture capital community in Boston has acquired a reputation, which I attribute to ARD, for being less adventurous, less ready to put a pile of money on the table, than is true in Silicon Valley,” said Hagan. “They acquired the notion, and it spread in Boston, that was ‘how you did it.’ You started with a relatively modest amount of money and turn profitble very quickly. The notion of needing a reasonably substantial startup nut was just plain foreign to ARD and the companies they spawned.”

While it is true that Doriot was criticized by some people for not investing large amounts of money in a few companies, I have to respectfully disagree with Hagan’s main point that ARD helped to retard the growth of New England venture capital. It is just not true. Without ARD, venture capital in Boston might not have ever taken off. ARD pioneered the model, which inspired many, many people in New England to enter the venture capital business and invest in startups. And one of ARD’s spin-offs, Greylock Capital, is one of of the best VC firms operating in New England, if not the best.

Second, it is NOT TRUE that ARD only invested $70,000 in Digital. In 1958, ARD invested another $30,000 in Digital to provide working capital for Digital’s expanding operations. And in 1962 ARD invested another $300,000 in Digital. That comes to a total of $400,000–a pretty significant sum even for the early 1960s. ARD was not just an early stage VC–they often invested multiple times in the companies they backed.

Third, it’s absurd to say that ARD had anything to do with Boston’s rep for being less adventurous. ARD always thought in big and bold terms and took enormous risks. I say blame the generation of Boston-area VCs after Doriot for not being more adventurous–and for not focusing more of their energy and time in Northern California where the microprocessor and biotechnology revolutions exploded.

What do you think? I am really curious to hear from other New England folks on this topic.

Reader Mail: Did DEC hire a PR firm and run a campaign against IBM?

Yesterday, a former assistant managing editor of BusinessWeek who ran our overseas bureaus, Robert Dowling, was kind enough to post a comment on the blog about the development of Digital Equipment Corp. I bumped into Bob a few weeks ago at an event for the Asia Society. I was pleasantly shocked when he told me he actually moved to China, where he is serving as an editorial advisor to Caijing Magazine, the top business mag in China from what I hear.

In many ways, blogs are all about reader and writer interaction. So I am going to start a new feature today called “Reader Mail.” From time to time, I will post a good question by a reader and then answer it.

Bob asks: 

“Hi Spencer:
Congrats on the book and blog. That’s an interesting and unexpected angle on DEC, and the VC community. I wonder what behaviors, typical of VC-backed start-ups, did DEC exhibit in those early days? For example, did they hire a PR firm and run a competitive campaign for share of voice against IBM?
Best,
Dowling”

spencerante says:

As far as I know, DEC was not a big user of PR firms. But the company was very savvy in its use of public relations–a lot of which came from General Doriot.

Every spring, Doriot held an annual meeting for American Research & Development. At the meeting, Doriot always organized an exhibit of ARD’s portofolio companies, where they could show off their products to the public and the press. Doriot also encouraged entrepreneurs to use the annual meeting as an opportunity to make important announcements.

The events were always well attended and often generated lots of ink and coverage. BusinessWeek, in fact, ran many stories that came out the event.  It was sort of the first high-tech trade show in a sense and was very innovative for its time.

Here’s a bit from my book about the meetings and their impact. It is based on the 1952 annual meeting, when the New York Times wrote a page one story about Ionics, a water purification company financed by ARD.

“At the end of the meeting, MIT Chemical Engineering Professor Gilliland stood up behind a podium and announced a startling new development. Gilliland, who doubled as the president of Ionics, demonstrated the company’s new membrane that desalinated seawater more cheaply than any other existing technology. The demo and related testimony by Dr. Compton and Harvard chemistry professor and Ionics director Arthur B. Lamb was so compelling that the New York Times published a page one story about the development: “New Process Desalts Seawater; Promises to Help Arid Areas.” The story written by William L. Laurence hailed a “revolutionary new process for desalting seawater” that promised to “open up vast new reservoirs of fresh water for use in agriculture, industry and the home wherever water is now scarce.”

The page one scoop was a coup for both ARD and Ionics, generating publicity and contracts for the new company. After it came out, Senator Flanders received a visit from Sheridan Downey, a former U.S. Senator from California. Downey, who was representing the city of Long Beach, said he was “tremendously interested in the announcement” and expressed a desire to jump-start the first field trials of the technology for the city. Senator Flanders arranged for Downey to speak with Ionics cofounder and vice president Walter Juda. The meetings eventually led to one of Ionics’s first commercial contracts. In the mid-1950s, the town of Coalinga, California purchased a system from Ionics, replacing the water supply it formerly brought in by railway.”

VC’s First Home Run: Digital Equipment Corp.

Before the blockbuster success of Google, Netscape and Apple, there was the first high-tech home run of Digital Equipment Corporation–a story that forms the heart of my book. Below I’ve posted two photos from the archives of Ken Olsen at Gordon College. I am the first person to gain access to these archives.

In 1957, ARD gave $70,000 to the two, young MIT engineers who co-founded Digital—Kenneth P. Olsen and Harlan Anderson—in exchange for 70% of the start-up’s equity. Olsen, who was Digital’s president and undisputed leader, wanted to build smaller, cheaper, and easier-to-use computers that would challenge the glass-encased mainframes of IBM, the dominant computer manufacturer and only one making money. In this sense, DEC was a pre-cursor to the user-friendly machines later pioneered by Apple.

[Ken Olsen at the annual meeting of ARD, surrounded by promotional booths of the other ARD portfolio companies.]

It was a perfect match. In Olsen, Doriot found the archetypal engineer-cum-entrepreneur who was dedicated to making his company a success. “A creative man merely has ideas; a resourceful man makes them practical,” said Doriot. “I look for the resourceful man.” Olsen embodied that ideal. In Doriot, Olsen found a comforting father figure always ready to offer words of encouragement or some bit of wisdom. The fates of these two men would be forever intertwined.

When ARD liquidated its stake in Digital in 1972, the company was worth more than $400 million—yielding a return on their original investment of more than 70,000%! It was the young venture capital industry’s first home run, and it helped make the Route 128 area outside Boston a technological mecca

[The DEC board was stocked with ARD staffers: (left to right) Henry W. Hoagland VP, ARD; John Barnard Jr. general counsel, Massachusetts Investors Trust; Jay W. Forrester, professor, MIT and ARD advisor; William H. Congleton, VP, ARD; Harlan E. Anderson, VP, Co-founder DEC; Kenneth H. Olsen, President, Co-founder DEC; Ms. Dorothy E. Rowe treasurer, ARD; Vernon R. Alden president Ohio University; Arnaud de Vitry, European Enterprise Development; Wayne P. Brobeck, former ARD staffer who became director of consumer relations, Vitro Corp. of America]

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