The bosses said yes, but they didn’t give Taylor a very large budget. For help designing the thing, he turned back to the academic researchers who had been grappling with questions of man-computer symbiosis for the better part of a decade. The resulting network, the ARPANET, was made by and for academics, and it reflected their priorities: ease of communication, nonhierarchical collaboration, with no particular hardware or software platform favored over another.
Time-sharing rapidly had become a profit-hungry marketplace, with different computer companies battling so fiercely to become the industry standard that the whole enterprise collapsed under its own weight. Other blue-sky electronic technologies—from radar and microwave to the transistor and IC—had become militarized, a fact that caused increasing distress among the academic community as opposition to the Vietnam War grew. The ARPANET was different: a child of the spit-and-polish space age, nurtured and shaped by a bunch of temperamentally anarchic professors and long-haired graduate students at the tail end of the tumultuous 1960s. It was a product of the military-industrial complex that had a countercultural soul.
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Richard Nixon was seven months into his Presidency when Neil Armstrong’s boot made its imprint on the lunar surface in July 1969, achieving the grand goal John Kennedy had set eight years before. The “missile gap” about which the Gaither Report had warned so darkly turned out to have been a mirage, based on bad intelligence. But the ensuing flurry had produced real results. The American push to catch up with the Soviets had accelerated all sorts of electronics innovation, further enlarged the computer industry, and turned the U.S. higher education system into the wealthiest and foremost in the world.
Three months and nine days after the moon landing, the ARPANET went live. The network was a tiny blip on the expansive and expensive landscape of America’s space program. Of the $24 billion spent on the space race between Kennedy’s declaration and Neil Armstrong’s “giant step for mankind,” only about $1 million went to build the ARPANET. Only a few academic scientists and government bureaucrats knew of its existence. Its launch didn’t earn a mention in any of the national newspapers. Yet looking backward from a half century on, the network the ARPANET became—the Internet—had a more consequential effect on the globe’s political and economic evolution than all the rocket launches and orbiting satellites and moon landings put together.
CHAPTER 5
The Money Men
The history of high technology often plays out as a sharp-elbowed Boston v. Silicon Valley rivalry. A story of winners and losers, of all or nothing. Yet the way things unfurled in those first postwar decades shows just how intertwined the two regions’ fates were from the start, linked by personal affection, professional envy, and the glue of federal contracting. The linkage—not just the rivalry—was part of what made each so powerful.
Fred Terman crafted his “community of technical scholars” with Vannevar Bush’s MIT in mind, a project of admiration as much as of competition. Raytheon got the NASA contract for the Apollo guidance system, and then subcontracted out the ICs to Fairchild. Time-sharing started at MIT and migrated west on a wave of the Pentagon’s money. The ARPANET mattered because it allowed Palo Alto and Berkeley and Cambridge and Washington and everywhere else to communicate and collaborate. And it was all about the people. The Valley teemed with MIT-trained engineers, Harvard MBAs, and people who’d once worked somewhere along Route 128. (The Valley enjoyed an advantage in that perpetual shuffle between the coasts, for few who experienced Northern California’s Mediterranean climate wanted to return to New England winters.)
Yet there were distinct differences between the two regions—ones that shaped what they ultimately became. Geography was destiny. As AnnaLee Saxenian observed in her definitive 1994 study comparing the two regions, the Santa Clara Valley’s remoteness from the centers of political and financial power turned out to be a tremendous advantage. It forced improvisation, nurtured new sorts of companies, and ultimately meant less dependence on the fickle bounty of the military-industrial complex. “In attempting to imitate” the model Bush and others had established in Boston, she writes, “they unwittingly transformed it.”1
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The Santa Clara Valley wasn’t a big city, but an isolated cluster of small bedroom suburbs. “When I moved out to the Valley, it felt like an oasis in the desert,” recalled Marty Tenenbaum, an engineer fresh out of MIT who came to Lockheed in 1966. He stocked up on a year’s worth of books in Harvard Square before he left, just in case he couldn’t find a decent bookstore. (He did find one, but not much else.) The people of the tech business were all friends and neighbors. With little to distract them, they spent their off hours talking shop on the sidelines of Little League games or debating semiconductor design in the leatherette booths of the Valley’s handful of pubs.2
In other contexts, the situation might lead to dead-end provincialism. Tied into the rivers of money and scores of people flowing westward into the military-industrial complex and into the classrooms of Berkeley and Stanford, it sparked a disruptive and highly effective new industrial model.
For Harvard and MIT may have been undisputed academic powerhouses, but they operated far differently than the entrepreneurial, opportunistic, ever-hustling Stanford. And Boston may have had bankers and Brahmins, but Northern California had young financiers and lawyers with a ground-eye view of the technology scene and the opportunities it presented to make a good deal of money. The Santa Clara Valley became a particularly brainy and well-resourced Galapagos, developing peculiar new species of business specialists who focused exclusively on high technology. No other place—not even Boston—had what the Valley had. It was this ecosystem that ultimately gave Northern California its competitive edge.
Even after the ascension of the chipmakers and the mini companies, go-it-alone entrepreneurship was a shaky proposition, requiring market knowledge and resources that no federal contract could provide. By and large, electronics entrepreneurs were young men from modest backgrounds, book smart but not Wall Street smart. These would-be Bob Noyces and Ken Olsens needed management advice. Guidance on marketing, sales, advertising. Legal help with writing contracts and filing patents and allocating stock options. And they needed money. Traditional banks—or, for that matter, most investors—were unwilling to give it to young men who’d never worked outside an academic lab, and who often were building products for which there wasn’t yet a market. Start-up founders required investors who understood the technology they were building, but also knew how to navigate the business world. And they needed someone who was a little bit of a gambler.
They needed a venture capitalist.
THE GENERAL
The morning fog hadn’t yet burned off the plum orchards as the rented blue Pontiac rumbled down the country road a few miles south of Palo Alto. Bill Draper was behind the wheel. His friend and business partner Pitch Johnson was doing the same thing, in another orchard, in an identical blue Pontiac. They did this every morning in those heady early days of Kennedy’s New Frontier: wake up early, hop in the rental cars, go on the hunt for deals.
Draper slowed down as he spotted a wooden barn looming up among the trees. A farmer had built it years before to dry the harvest, but as he got closer Draper could tell it wasn’t full of prunes any longer. Nailed up over the door was a sign with a company name on it—syllables of “techs” and “trons” that signaled a fledgling electronics operation inside. Rolling to a stop, Draper hopped out of the Pontiac and headed to the door.
A brisk knock, and the door opened. Another young man in shirtsleeves squinted out into the morning light. Draper introduced himself and got right to the point. “I’m a venture capitalist. We buy minority interest in companies like yours, and turn over money to you to grow your business.” That was all a cash-poor entrepreneur needed to hear. “Come on in,” the young man replied. Draper had just snagged anot
her one. Morning after morning, company after company, Bill Draper and Pitch Johnson became the go-to guys if you were a young and hungry electronics company.3
Handsome and confident, with the stride of a natural athlete, William Henry Draper III was a different sort of California migrant than heartland boys like Burt McMurtry and Bob Noyce. Born on New Year’s Day 1928, he was the son of a distinguished banker and diplomat, raised in the affluence of Westchester County, a veteran of Korea, a member of the exclusive and ultra-secret Skull and Bones society at Yale. After graduating in 1950—one year behind fellow Bonesman and future president George H. W. Bush—Draper headed to Harvard Business School.
He landed in the lecture hall of the “inspirational” Georges F. Doriot. The Frenchman, known as “General Doriot”—he had become a U.S. citizen to join the Army during World War II, and had reached the rank of brigadier general—was five years into his tech-investment career as president of American Research and Development Corporation (ARD), but his Digital investment was still years in the future. Then, Doriot wasn’t yet a venture capital legend, but simply one of the MBA program’s most popular faculty members.
The professor’s yearlong course had a deceptively bland title, “Manufacturing,” but was an energizing journey of lectures and real-world experience that “taught us what it was really like to be a businessman,” said Draper. “I am building men and companies,” the professor proclaimed. (As HBS didn’t admit women, Doriot offered a simultaneous class for students’ wives that offered helpful tips on how to be a supportive executive spouse, like cutting out relevant BusinessWeek articles for their husbands and greeting them at home with a favorite drink after a long day at the office. Draper’s wife, Phyllis, didn’t like it one bit.)4
While venture capitalists—VCs—later got a popular reputation as convention-bucking cowboys, the early breed were tradition-bound products of the business establishment. Doriot was no exception. The fastidious Frenchman had left the Army but kept to a schedule of military precision: rising at seven each morning to walk to work, keeping long hours broken only by a ten-minute lunch in the office cafeteria, and regularly awakening at 2:00 a.m. to mull over a thorny business question. “Always remember,” he warned his students with a stern glare, “that someone, somewhere, is making a product that will make your product obsolete.”5
The venture fund Doriot helmed was the brainchild of Ralph Flanders, a three-term Republican senator from Vermont who had previously directed the Boston Federal Reserve. (The flintily independent Flanders gained fame as the first fellow Republican to censure red-baiting Senator Joseph McCarthy in 1954.) The other original financiers were similarly blue of blood: John Hancock Life Insurance head Paul Clark, Massachusetts Investors Trust’s Merrill Griswold, and Karl Compton, president of MIT.6
Doriot may have popularized the “venture capital” label, but investment in new and risky ventures wasn’t a new thing—far from it. From Queen Elizabeth I’s court to the Florence of the Medici to the financiers who gave seed investments to Henry Ford, wealthy people and interests long had been willing to make bets on new and relatively untested ideas and companies. Making “adventure capital” investments in new industries became something of a hobby among the sons and grandsons of Gilded Age millionaires. By the middle of the twentieth century, enough of these bets had paid off that family investment funds—like those of the Rockefellers and Whitneys—had turned into reliable sources of financing for early-stage companies in a range of industries. Insiders called these sorts of deals “private placements.”7
Old-money titans didn’t know a thing about how electronics worked, but they could smell the money in it. Doriot’s contribution was to play matchmaker, using his deep familiarity with Boston’s research scene to sniff out the tech, find the entrepreneurs, and connect them to the moneyed elite. By the time Bill Draper strolled into his Harvard lecture hall, the General had raised millions of dollars from both individual and institutional investors that seeded investments in quite a few companies. Most were in Massachusetts. Draper sensed an opportunity.
So did his father. The senior William Draper had been Truman’s Undersecretary of the Army and then headed over the Atlantic to direct European operations of the great American postwar rebuilding project, the Marshall Plan. His deputy there, Fred Anderson, was another distinguished military man and diplomat. The two became fast friends. Returning back to the States, the two men joined up with a third partner: none other than H. Rowan Gaither, the Paul Revere of the missile gap.
Two years after Gaither’s fateful report helped set the tech-spending flywheel in motion, the three men blended their Wall Street expertise and Washington connections to bring Doriot’s venture model to the West Coast. The structure, though, was a little different. The General ran ARD as a closed-end, publicly traded mutual fund; the trio opted to make their operation a limited partnership, in which the partners made most of their money on the “carry”—a hefty chunk of any profits made by the fund.
The limited-partnership model, which became the prevailing one for Valley VCs in later decades, intertwined the money man’s financial fate even more tightly with those of his portfolio companies. It encouraged him to choose bets carefully and maintain an intensely hands-on managerial relationship with his entrepreneurs. By securing a large percentage of a company as payment for his seed capital, the VC became the entrepreneur’s most important business partner—and possibly the one enjoying the biggest returns. The hit rate was only one in ten. But, with the money to be made in electronics, you only needed one big hit.
After raising $6 million from New York financiers, including a cool $2 million from the Rockefeller family, Draper, Gaither, and Anderson opened for business as Palo Alto’s first venture capital firm in 1959. Young Bill Draper came west to join them shortly afterward. Funnily enough, the firm that pioneered the limited-partnership structure wasn’t all that successful, largely because the three founders were too busy and too grand to put all else aside, roll up their sleeves, and enwrap themselves in the day-to-day management of their portfolio companies. You needed young men to do that, men who hadn’t yet made their fortunes and their reputations, men who were willing to rumble out in the blue Pontiacs and chase down the deals.8
THE GOVERNMENT
Venture capital might have remained something of a boutique business, the province of connected Ivy Leaguers and dabbling trust-funders, if Lyndon B. Johnson hadn’t wanted to be president.
In the summer of 1958, Johnson was in his fourth year as Senate majority leader, wrapping up a truly spectacular season of legislative accomplishment, and thinking about how to win the 1960 Democratic presidential nomination. To get there, he needed the support of the Democratic Party’s northern liberal wing, who saw the garrulous Texan as just another Southern obstructionist when it came to civil rights. Then, once nominated, he needed to work hard to appeal to the business constituencies inclined toward his likely Republican challenger, Vice President Richard Nixon.
One issue that hit both of these targets: small-business investment, which was widely perceived to be in short supply, stifling economic growth by discouraging would-be entrepreneurs from hanging out a shingle. It was just the kind of legislative challenge Johnson relished. Small business was also good politics when it came to the man from Abilene, President Dwight Eisenhower, a longtime champion of small entrepreneurs—operations “vitally important to the soundness and vigor of our system of free competitive enterprise,” as he put it.
Democrats in Congress had been trying to pass something along these lines since the 1930s, to no end, partly because their approach involved setting up a large government bank, whose rationale and cost had little appeal for Republicans. Johnson knew that he’d need something with more of a private-sector focus. For help, he reached out to a Harvard professor known as an expert on this sort of thing: Georges Doriot.9
Wrangling his fellow lawmakers as the summer recess approach
ed, Johnson won successful passage of a “Small Business Investment Act” that set up an eye-poppingly generous set of tax breaks and federal loan guarantees for small enterprises and their investors. Set up shop as a Small Business Investment Company, or SBIC, and for every dollar you raised of your own capital, the feds would guarantee three dollars more in long-term loans. There were tax incentives for early-stage investment and special breaks for “management consulting services.” It was Doriot’s model, with the U.S. government subbing for the Rockefellers as deep-pocketed angel. Loosely regulated and thrown wide open to nearly anyone who wanted to create one, the SBICs became what one later critic scowled was a “license to steal.”10
Although Johnson’s measure became background noise amid all the news-making legislation of the year—NASA! NDEA! civil rights!—the new program was an immediate hit with investors. By 1959, more than 100 SBICs were in business; by 1961, the number soared to 500. The program brought a surge of new people and firms into the business, allowing ambitious young men to become venture capitalists even if they weren’t already rich. The program kicked off a wave of new investment funds across a range of light manufacturing and white-collar service sectors, but especially in electronics, where the post-Sputnik surge had created a large and hungry military market.11
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