by Norman Oro
Guy Pool decided to take his chance during their 1976 reunion. Once everyone was seated at Professor Marshall’s kitchen table to discuss the next fund, he started walking them through his proposal. Instead of continuing to finance component manufacturers, he recommended using PC2 to finance companies that would turn computers into ubiquitous home and office appliances. The analogy he used was the television and the telephone. In his opinion, the ARC demonstration in 1968 showed that the computer had promise as an everyday appliance similar to the television. Instead of dispensing entertainment, however, the computer was more geared towards dispensing information. He believed the trend towards smaller, more powerful and more user-friendly machines would soon turn that promise into a reality.
As computers became more commonplace, people would eventually realize that they were even more compelling networked together. Like telephones, computers could connect people. Using modems, Guy Pool reasoned that everyday computer users would increasingly share things like electronic letters, personal documents, business data and photos the way phone users shared conversations. As more people had computers with that capability and the network grew, others would want to purchase computers to share information and media with their friends or business associates already on the network, essentially creating a positive feedback loop. Ultimately, the widespread adoption of interconnected computers in the home and office would result in a vast, decentralized information system that could also be used as a platform to monitor and regulate the use of Allen field technology. Field activity detected anywhere on that global web of networked computers could be instantly communicated to any other networked computer. He was convinced that when the second field condition was fulfilled, it would largely be through networked computing. As a result, he suggested using Pacific Capital II to finance companies that would hasten the first leg of that vision, namely the computer’s transformation into an everyday appliance.
He paused once he was done and looked around the table to gauge how his proposal was received. Unfortunately, rather than the knowing nods of approval he’d grown accustomed to, he saw instead looks of intense skepticism. In fact, if he didn’t know his friends better, he might’ve even described it as hostility.
Dr. Gidsen led the charge. He started by noting that the shift in investment strategy to an even less established sector of the computer industry seemed to make an inherently risky class of assets even riskier, especially considering that their component-focused approach was already delivering annual returns to their investors that hovered around 50%. They had a responsibility to provide their limited partners with a solid return on their investments. Guy Pool responded by agreeing completely that they had a responsibility to their investors. However, he also pointed out that, in a sense, Pacific Capital had been profiting from a coincidence. It just so happened that the industry that would one day supply the technology for the field monitoring system was growing into one of the most dynamic and profitable sectors of the US economy. On the other hand, if the second field criterion involved boosting the per capita consumption of avocados then they’d stoically be taking whatever lumps they had to in order to make certain people ate lots of avocados. The fact that they just happened to be in the computer industry shouldn’t change things. In his estimation, the only reason for Pacific Capital’s existence was to help develop the means through which Allen field research could resume and a second field generator could be built.
This had a surprisingly jarring effect on Dr. Gidsen and Professor Marshall. The years had slowly eroded their memories of the other breakthrough technology they’d taken part in developing nearly twenty years earlier; and more worrying perhaps was the fact that the memory of what happened on July 15th, 1959 seemed to have faded, as well. Over the ensuing years, they’d all grown so successful that it was almost impossible not to let US-395 go. In fact, that arguably may have been precisely what Dr. Rys and his son would’ve wanted. Barring them being there and telling them so, however, that held little weight. At that, they all agreed to honor the commitment they’d made when they founded Pacific Capital; and reaffirmed that helping to get their former colleagues home was the firm’s priority.
Later that evening, a compromise was finally reached with Guy Pool agreeing to clearly state the new investment focus and its associated level of risk in Pacific Capital II’s prospectus to potential investors. He also agreed that any capital left over from investing in decentralized computing would go towards more traditional computer component and equipment manufacturers. With that, it was finally agreed that PC2 would help finance what would become known as the personal computer industry.
Though it was tougher than he’d expected, Guy Pool did just manage to build a consensus around his proposal. As Dr. Gidsen might’ve said, the rest would be a walk in the park. He’d already done a fair amount of preliminary work looking for the beginnings of the computer appliance industry he’d envisioned. In fact, he began a kind of vigil shortly after the ARC demonstration in December 1968 searching for companies that might one day lead in bringing computers to the masses. To complement the conferences and trade shows he normally attended, he also joined computer clubs to see where hobbyists were taking the technology. He personally believed that in those clubs were people who might one day start the next generation of computer businesses he’d been seeking. His participation in one of those groups, the Homebrew Computer Club, led to the investment that would go on to define Pacific Capital II.
In December 1976, the club showcased a prototype that resembled what Guy Pool imagined the next stage of computing would look like. It came pre-assembled, not as a kit, could generate color graphics through a household television or dedicated computer monitor, ran software applications, and came equipped with a keyboard and power supply. When he saw the final product debut in 1977, he knew he was looking at the future. It was called the Apple II.
Unfortunately, however, Apple was a dead-end as a potential investment. At the time, the company’s founders and management team were getting along well enough financing their operations on retained earnings and credit. Nevertheless, like many, Guy Pool was so impressed with the Apple II that he gave them a business card anyway, just in case they ever needed outside funding. A few months later, he got an unexpected phone-call and in January 1978, Pacific Capital II invested $250,000 as part of a $750,000 round of funding. By the time the fund closed in September 1984 that investment was worth $75 million.
Despite its successes, the picture wasn’t entirely rosy for the firm’s second fund. Some portfolio companies failed, leaving Pacific Capital II to collect just cents on the dollar, if that. Still, their fortunes held for the fund as a whole; and ultimately only $750,000 in committed capital was completely lost out of $10 million raised. With characteristic modesty, Guy Pool wrote in his final letter to PC2’s limited partners that the firm continued to deliver solid returns for its investors. Each dollar invested in Pacific Capital II netted out nine dollars after eight years, generating an annual rate of return of 37%.
If money had ever been an issue before, barring an extraordinary binge of conspicuous consumption, it wouldn’t ever be again for the firm’s partners. In spite of their wealth, however, they were conservative by nature, which precluded the truly awesome displays of spending that some of their contemporaries had become known for. Guy Pool kept most of his money in equities, placing it in a blind trust. How the trust invested his wealth was kept secret from him to avoid any conflicts with respect to his work at Pacific Capital. To cover daily expenses and provide a comfortable living he used interest on some 10-year Treasuries he’d purchased.
Managing his finances advantageously took on new importance that year: He and Piper Finesine had welcomed their son, Alberto Finesine Pool, into the world several months earlier. Dr. Finesine, who’d been a mathematics professor at Berkeley, retired from academia to raise their son and administer the Allen Foundation. Though he never took credit for it because of his desire for privacy, Guy Pool
was proud of the foundation and the lives it’d touched. As with his windfall from PC1, he dedicated a substantial portion of his return from PC2 to his scholarships for college-bound students in the East Bay majoring in engineering or the sciences. Two Allen Foundation scholarships were now awarded every year, covering tuition, room and board.
As for the firm’s other partners, Dr. Gidsen once again donated a portion of his money to his alma maters and to his wife’s favorite charities, while setting aside the remainder for the firm’s third fund. Among them, Professor Marshall was perhaps the biggest spender that year. Aside from his usual sizeable donations to alumni funds at UCLA and Caltech, he took his daughter, Amelia, and his wife on a month-long vacation around the world. Also, his son, Alberto, had just graduated from UCLA with a degree in computer science, so Dr. Marshall saw to it that he drove a new F150 to his first day of graduate school at Berkeley.
Understandably the mood during their reunion that summer was ebullient. The computer industry that they’d helped to grow was arguably the most dynamic sector of the economy and it seemed only a matter of time before Guy Pool’s vision of a worldwide decentralized computer network would be fulfilled. Furthermore, they’d all prospered more than they’d imagined was possible from their efforts to help realize the second field condition. And last but not least, they welcomed a new attendee to their gathering that year with everyone marveling at the unexpectedly solemn presence that was Alberto Finesine Pool. Life was good.
After a nice meal spent taking in the cool and sunny Carpinteria weather, Guy Pool, Professor Marshall and Dr. Gidsen settled down into their usual chairs around the kitchen table for that year’s afternoon discussion. The topic, of course, was whether they needed to proceed with a third fund. As the general partner most involved in the firm’s activities, they asked Guy Pool for his opinion. Although there was no shortage of potential investors that year, his candid and somewhat surprising answer was, “No.” In his opinion, launching Pacific Capital III was unnecessary.
After a few moments of silence, he elaborated. Essentially Guy Pool believed that the momentum of events had made realizing the second field condition all but inevitable; and if it wasn’t PC3 financing the next generation of startups, other funds almost certainly would. Uncharacteristically, he left it at that, an open question, adding only that he was fifty-three years old and if called upon, he still had at least one more fund left in him. After that, he estimated it’d take another ten years until the second field condition became completely viable around the turn of the century. They spent the next few hours debating the issue, forgoing dinner. Ultimately, the sense that their work wasn’t finished yet, that perhaps a third fund could help realize the second field criterion even sooner, prevailed. By late evening, just before everyone began leaving, they agreed to launch Pacific Capital III.
When the time came to raise money, there was no lack of investor interest. In fact, a venture fund had closed just a couple of years earlier with a staggering $150 million in committed capital. Though tempted, rather than raising a mega-fund, Guy Pool chose to keep PC3’s size in line with the firm’s conservative reputation. After speaking with Professor Marshall and Dr. Gidsen, he set out to raise a fairly modest $20 million in committed capital of which each general partner contributed $1 million.
With developments in the computer industry continuing to uncannily bear out his vision, Guy Pool was given free rein in terms of how Pacific Capital III would be invested. Nonetheless, he still sought consensus on every investment decision just as he’d done in the past. After some discussion, they all agreed that PC3 would help finance the second leg in the evolution of information systems that Guy Pool had outlined eight years earlier. By 1984, personal computers were becoming increasingly commonplace. If his vision held true, networks of computers sharing information with one another would become more widespread. PC3 would therefore seek to invest in companies that enabled information sharing within computer networks. They also agreed to broaden the fund’s investment criteria. After discussing numerous business plans, a sort of pecking order emerged in terms of what they’d finance:
1. Early to middle stage computer networking companies that had a compelling idea, but couldn’t get funding.
2. Early to middle stage computer networking companies with a compelling idea that could get funding.
3. Computer networking companies at any stage with a compelling idea.
The criteria ultimately served them well in identifying profitable investments with two companies in particular going on to define PC3. The first built computer workstations and servers. It was called Sun Microsystems. The other sold relational database software that enabled the computerized storage, organization and retrieval of large amounts of information. That company was called Oracle. Pacific Capital’s early stage investment of $10 million in Sun Microsystems generated a gain of $28 million for the fund’s limited partners. As for Oracle, though PC3 was only able to participate in its financing by subscribing to its initial public offering, the partnership’s $8 million investment there resulted in a very healthy $53 million gain for investors. Despite the fund’s overall success, it did finance its share of unprofitable ventures. In fact, $2 million of the $20 million originally contributed was written off entirely, which was on the high end for the firm. Nonetheless, PC3 earned a respectable annual return of 24% for its limited partners, netting them about five dollars after eight years on every dollar invested.
Whether it was because of the ever increasing speed with which the computer industry seemed to be moving or his new responsibilities as a father, Guy Pool’s time managing the firm’s third fund seemed to be the most fleeting. Before he knew it, it was already summer 1992 with only a couple of months left until Pacific Capital III ended. Their get-together that year found the firm’s partners and their families well. Professor Marshall’s son, Alberto, had completed his PhD in computer science and was teaching at UCLA. His daughter, Amelia, had just graduated from Wellesley with a degree in chemistry; and was living in Paris with her boyfriend while pursuing a career in ballet. Little Alberto Finesine Pool wouldn’t have to worry about college for another decade, but he was growing quickly. Dr. Gidsen and his wife decided not to have children; however, that year’s reunion found them as busy as ever with US-395’s former historian making his first run for the US House of Representatives and Julia involved with her philanthropies. Life was already very good. As a result, Pacific Capital III’s success made almost for an embarrassment of riches. So, during their gathering that summer, the Marshalls and the Gidsens offered to entrust Guy Pool with whatever windfall they’d receive from PC3 to invest as he saw fit, no strings attached. He wasn’t obligated to do so, of course, but they extended the offer in case he was interested. Still very much engaged in the industry that he’d been a part of for so long and feeling he still had one last fund in him, Guy Pool accepted.
As for the firm itself, it was clear that it’d served its intended purpose well. Fulfilling the second field condition was in sight; and Pacific Capital had been an important part of that. It was time to begin considering what it would become once its original purpose had been achieved. The consensus in the group was that it should continue being a venture capital firm, albeit one without any ties to US-395 or to Pueblo. Given that, thoughts turned to succession. Specifically, a year earlier, Professor Marshall’s son, Alberto, had expressed an interest in working in venture capital. His research at UCLA centered around computer networks in general and what was increasingly becoming known as the Internet in particular. He felt some of the most exciting work in the field was being done not only in academia, but in industry, as well. In light of his technical expertise and intelligence, the firm quickly decided to hire him. A month later, after resigning from UCLA, the younger Dr. Marshall became Pacific Capital’s first associate.
From the start, Guy Pool knew his last fund wouldn’t be like the others. First of all, he made it flexible. Though the firm’s expertise was in
early-to-mid-stage technology companies and it’d keep its focus in that area, the fund’s money could go into any asset class, not just equity positions in startups. Second, there’d be no fundraising or carried interest; all three partners went in as equals with committed capital totaling $15 million. Also, because of the likelihood that he’d soon be in public office, Dr. Gidsen recused himself from investment decisions and wouldn’t be made aware of the fund’s holdings until it ended in September 2000. Finally, they retired the firm’s original naming convention. There would be no Pacific Capital IV. Instead, as a sign of their gratitude for the material success they’d all experienced, they named it the Jalama Fund.
