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Discovering Doriot Societies

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Discovering Doriot Societies is idea defied financial logic. It would take too on to become one of Harvard’s most influential Hlong, the risks were too high, and the rewards professors, whose 40-year teaching span inspired too small. Wall Street experts said it’d never work. some of the most prominent executives of the day, But, never say never. Proving the naysayers including Fred Smith, founder of Federal Express, wrong, this man watched a single investment earn and Ralph Hoagland, co-founder of CVS Corp. over 500,000 percent — seeing that investment In 1940, he received his U.S. citizenship and, more than double every year for nine straight years. the following year, enlisted in the U.S. Army. A It’s a mind-boggling number. To put it in lieutenant colonel and chief of military planning perspective, if you invested $1,000, a 500,000 for the Quartermaster Corps, Doriot put his percent increase would yield a $5 million windfall. manufacturing skills to good use by upgrading That’s impressive, considering this was an idea that military equipment, which earned him a wasn’t supposed to be viable. promotion to brigadier general. His improvements That alone would be a great ending to the story, included better shoes, cold-weather gear, uniforms, but it marked just the beginning of something tents, sunscreens, insecticides, freeze-dried foods, that would turn this man’s seemingly strange idea and powdered coffee. into industry standard practice. He changed the Then, due to a shortage of metallic armor in way we seek opportunities, the way we calculate 1942, he was called to oversee the invention of a risks, and the way we make serious money. lightweight plastic armor, and he succeeded in Who is this guy who could completely unravel developing a fiberglass-plastic combination that conventional Wall Street wisdom? was named “Doron” in his honor. Well, it took an unconventional man, one After being discharged from the Army, Doriot with diverse skills acquired from the military, returned to Harvard in 1946, where he continued manufacturing, business, and academia — skills to teach his highly praised manufacturing course. that created a visionary who forever changed the Rather than focusing on teaching the industrial capital markets. side of the business, though, he spent most of the His name is Georges Doriot, and while the time talking about his interests in other aspects name may not be familiar (though some will of enterprise, high-level executive problems, and know him as the founder of INSEAD, Europe’s globalization. top business school), he is considered a leading And it was through these discussions that an light of the most productive and profitable area of idea was sparked — one so innovative, it would investing — venture capitalism. fundamentally change the economy. Born in 1899 in France, Doriot grew up immersed in the world of small business start-ups From Idea to Innovation and manufacturing. His father was an engineer Doriot understood the importance of who helped invent the first car for the start-up globalization and innovation for economic growth. Peugeot Motor Company. He showed his students how railroads and air After a short stint in the French army, Doriot travel created new opportunities, and how they came to America in 1921 to earn an MBA. also created competition, which created even Although he dropped out of the program, he went more opportunities. He taught his students that to About Tom Hutchinson I’ve worked in finance my entire career, from the back office of a Wall Street firm to the floor of the New York Mercantile Exchange learning how markets work. Eventually, I became a financial adviser where I met with thousands of investors and managed the portfolios of hundreds over the course of about 15 years. I left my career as a financial adviser, writing for The Motley Fool as well as StreetAuthority LLC, researching companies, industries, and markets. In The High Income Factor, I can bring you the full benefit of my years of investing experience. 2 TheHighIncomeFactor.com Special Report achieve economic progress, innovation is key. immediately following World War II, two other But he also gave warnings to his classes about venture capital firms were created: J.H. Whitney & the need to stay ahead of the competition: “Always Company and Rockefeller Brothers. remember that someone, somewhere, is making a In fact, the term “venture capital” was coined by product that will make your product obsolete.” one of J.H. Whitney’s founders, when he described He was right. As Bill Gates acknowledged more the company as a lender of private adventure recently, “Whether it’s Google or Apple or free capital; he later shortened it to venture capital. software, we’ve got some fantastic competitors, and But rather than pooling money together it keeps us on our toes.” from many investors, like Doriot planned, more Doriot saw a big obstacle, however. While traditional venture capitalists would contact revolutionary ideas were probably brewing around only wealthy moguls such as J.P. Morgan, the the world every single day, most of these start- Rockefellers, the Vanderbilts, or the Rothschilds to up companies were unable to raise the necessary finance an idea — or at least use their connections money to get off the ground. To make matters to find investors. For instance, in 1922, the worse, money was tight after World War II, and the Vanderbilts helped start Pan Am. In 1938, Laurance banks weren’t lending. S. Rockefeller helped finance Eastern Airlines and These groundbreaking ideas would never Douglas Aircraft. become realities. Instead, they’d remain trapped Not just anyone was allowed in these private in the innovators’ minds. It was a serious setback equity deals. Only accredited investors were to economic progress, and Doriot wanted to do eligible; that is, individuals or households with over something about it. As he’d profess to his students, $1 million in assets, not counting their primary “A commercial bank lends only on the strength of residence, greatly limiting those who’d qualify. For the past. I want my money to do things that have legal reasons, in most cases, venture capital projects never been done before.” could only accept a maximum of 500 accredited And so his idea was born. investors, narrowing the pool even further. In What if, he wondered, you could pool money other words, these private equity deals were only together from lots of investors and use that money available to the politically connected, wealthy elite. to invest in many start-up companies? By holding The trend continues today. Bill Clinton, Al an entire portfolio of start-ups, you could spread Gore, Timothy Geithner, Colin Powell, Dianne the risk. Rather than betting on the performance Feinstein, Newt Gingrich, and many other of a single company, you’d be betting on averages. prominent figures have participated in private It would just take an occasional home run to more venture capital deals and made millions. There’s than offset the losses from many others. And those easy money to be made — provided you’re on the home runs could be knocked out of the park inside. It’s all for them and none for you. further than any other investment imaginable. And no wonder nobody wanted to share. While Why shouldn’t it work? After all, oil companies the S&P 500 generates returns of 7 percent to 10 succeeded by owning a portfolio of potential percent per year, one study showed an average oilfields, and motion picture companies succeeded return among these private equity deals would by holding a portfolio of movies. Their success have notched 30 percent per year, every year, for 20 didn’t depend on a single project being successful; straight years. their success depended on the winners being far The chart at the top of the following page bigger than the losers. shows the results of a $1,000 investment at 10 Doriot’s idea was a slight but powerful twist on percent per year compared to 30 percent per year the idea of venture capitalism, which had existed over 20 years. At 10 percent, you’d increase your in various forms throughout history. Doriot was investment to $6,727 — nearly sevenfold over 20 certainly not alone in terms of wanting to fund years. At 30 percent, it would increase by a factor start-up companies in exchange for equity of 190 to $190,000. That means a modest $10,000 or ownership. During this enterprising time investment would turn into $1.9 million. Special Report NewsmaxFinance.com 3 200 Rockefellers chose to invest in airlines and aircraft 180 in the early 1900s; it was the industry leader of 160 innovation at that time. 30% 140 Doriot felt the problem with the traditional 120 approach of investing directly into one company 100 is that you’d either strike it rich or fail miserably. Thousands 80 You were faced with extreme outcomes: either the 60 road to riches or doorway to destruction. It was 40 too risky. To counter that “all eggs in one basket” 20 10% risk, Doriot believed big money could be made by 0 taking calculated risks and nurturing numerous 0 2 4 6 8 10 12 14 16 18 20 start-up companies over decades. Why not raise Years money from many investors — not just a single family or small group — and pool that money into Of course, these insiders were investing a portfolio of innovative companies? millions from the outset, so you can only imagine In other words, why not create a publicly the wealth they generated. traded company for venture capital? By allowing The S&P 500 has never performed like that.
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