John

On 1961, Arthur Rock and Tommy Davis setup Davis & Rock, the first venture capital vehicle as we know it today (GP/LP structure) It promised to make concentrated bets on a dozen or so ventures. What seemed like a reckless idea to modern portfolio theorists was totally sensible to them for two reasons: First, buying just under half of a startup’s equity, the partnership would get a seat on the board and a say in their strategy exercising a measure of control over the assets. Second, they would only invest in ambitious, high-growth companies whose value might jump at least tenfold in 5-7 years. Most startups would fail but the winners would have to win big enough to make the overall portfolio a success. Having discarded conventional investment wisdom they also realized that people, not financials, were all that mattered at this stage. The central principle became “Back the Right People” or as Rock liked to say finding “intellectual book value”. The firm proceeded to make 15 total investments from $3.4 million it raised and in less than 7 years it returned $77 million to its investors, or 22.6X. The fund’s gains came primarily from its investment in Scientific Data Systems (acquired by Xerox eventually) and Teledyne. This opened the floodgates to startup investing and the modern Venture Capital era began. Source: The Power Law by Sebastian Mallaby