Doriot Quote Of The Day

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.

#VC & Technology

Comments (Archived):

  1. zachlandes

    When you consider that Buffet has returned 22% over 40 years and that his success is one of the great investing accomplishments of all time, 17% sounds pretty darn good!

    1. fredwilson

      Right. 17pcnt is not that impressive but 17pcnt over 21 years sure is

  2. WayneMulligan

    Hmm…but then again, you have to actively manage a VC fund. It’s not like you can throw your money in an index fund, leave it there and then go sailing. The risk component is also substantially higher, not to mention liquidity issues. Is 17% really “worth it” when we include opportunity cost in the calculation?I guess what I’m really asking is if there’s a qualitative component in it for you? Do you just personally enjoy funding and working with early stage companies more than you would investing in publicly traded stocks? What made Fred Wilson go VC instead of Hedge Fund?-Wayne

    1. fredwilson

      i am a terrible public market investorproof:…i wake up thinking about our portfolio companies and the challenges they facei never wake up thinking about my public stock positions

  3. awilensky

    When Ken Olsen was looking for the first what we be called angel rounds in the 1970’s, he made a tour of the then power Massachusetts garment manufacturer owners. DEC was in it’s infancy, and they were proposing not yet built or designed Minis and software for storing the patterns and back office accounting. The crowd that they were pitching to could not have been less technical, and less enthusiastic.Bernard Bloom, owner of a Kneeland St. Garment factory that was, in its heyday, quite the shizzle, heard Olsen and co. and frowned, My dad was there as chief pattern maker and a potential investor, as he was early in the RT128 over the counter market.Bloom turned to my dad and said, “who is the a-hole Olsen, and what does he mean, ‘smaller departmental computers?, tell him to go home”.My dad did take a piece of the round, but did well in many investments that sprang up around 128. It was 1971-72, maybe. Those that subscribed to the DEC warrant became , as you know, multi-millionaires.

    1. fredwilson

      great story

  4. thomasl824

    The Times review/article was a great backgrounder since I was not familair with him. People will be drooling for 17% in a normal run and if you toss out 1999-2000

  5. lboord

    Consistently escaping the gravity pull of market returns is rare accomplishment. Some argue that it is simply random (, like an outlier typical of any random sampling.

    1. gregory

      as he does in the black swan as well … and this is uniformly the position of every mystic or guru i have ever met ….

  6. Mats Myrberg

    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.

    1. fredwilson

      without the DEC IPO the record was much less.but that’s the venture business

    2. Spencer Ante

      Hi, this is Spencer Ante, author of the Doriot bio, Creative Capital. This is a cool thread, the kind of discussion I hoped my book would spark. Thanks for hosting the party Fred!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 portfolio1968 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.

      1. fredwilson

        SpencerThis blog has been taken over by doriot as of late. I am almost done with your book so that will probably end soon but its been a great runThanks for all of that data. Its very usefulEarly stage VC takes time to produce strong returns and I am not surprised by the eight years it took to get into positive territoryBut ARD also had to figure out what made sense to invest in and what did notTuna fishing, for example, seems like a bad idea in hindsightFred

  7. Steven Kane

    completely agree.historical total market returns are around 9-10% per 17% annual return after fees and carry handsomely rewards the illiquidity, volatility and risk in the investment.(btw, did ARD take fees of 2+20? probably a lot less back then?)any case, fred, how many contemporary funds do you think are providing their LPs sufficiently above-total-market returns?

    1. fredwilson

      i don’t really know steve, but i suspect it’s less than half, maybe less than 25%

    2. Spencer Ante

      Hey Steve, this is Spencer Ante, the author of the Doriot biography, Creative Capital.Doriot, who ran American Research and Development, the firm that financed DEC, NEVER took any carry from the profits on their investments. When ARD was losing money In its early years, however, it did charge its portfolio companies a small investment fee. Remember that ARD was a public company trading on the NYSE for many years until it was sold to Textron in 1972. So it did not follow the partnership profit-sharing model.And as I argue in the book, that was part of its downfall. ARD never figured out a way to allow its investment professionals to share in the profits of their labor. The SEC refused to let ARD issue stock options of affiliates to its employees. And truth be told: Doriot was an old school guy who resisted the new culture of money and instant gratification that emerged in the 1960s. His exasperation was so great he sometimes ranted against the invention of stock options.

      1. Steven Kane

        Hi Spencer. Wow, thank you for your response.Fred, if ARD did take today’s level fees of 2%+20%, then it would still havebeaten the total market, but by a lot less – an annual IRR of roughly 12%, Ithink?

      2. fredwilson

        That’s something I am trying like hell to avoid – becoming old school

        1. Steven Kane

          me toobut i think you’re succeeding much much better than me;)

  8. Michael

    You may be right. As a corollary, I would add that there would probably be less wasteful rent-seeking among VC funds for best teams if there were a steadier stream of ideas worth commercializing. IRR won’t go up for the industry as a whole, but the returns might be more evenly distributed.