The Golden Passport

by Duff McDonald

  A wiry five feet, ten inches with a thin mustache that Peter Sellers might have worn, Georges Doriot had a career at the Harvard Business School cut across four decades, from his time as an MBA student in the mid-1920s all the way through to his retirement in 1966. He was one of those immigrants who never lost their accent, a fact that helped him charm students, investors, and entrepreneurs for half a century, during which he became “arguably the most influential and popular professor at [HBS].”2

  Born in 1899 to an automotive engineer who helped build one of the first cars for the eventual Peugeot Motor Company, Doriot experienced the allure (and challenges) of entrepreneurialism from an early age. His father quit Peugeot when Georges was just three years old and eventually cofounded automobile manufacturer DFP. While the company was wiped out in the aftermath of World War I (during which Doriot the younger served as an artillery officer with the French Army), it nevertheless provided enough for Georges to attend a Paris lycée (he graduated with a baccalaureate science degree in 1920) and then head across the Atlantic, with a plan to study at the Massachusetts Institute of Technology.

  While intending to register at MIT, Doriot also arrived in Boston armed with a letter of reference addressed to someone he’d never heard of, a man named A. Lawrence Lowell, and decided that the polite thing to do would be to introduce himself to this total stranger first. Lowell, of course, was the president of Harvard. When he received Doriot in his office in University Hall, he asked Doriot what he wanted to do with his life. Doriot told him he wanted to run a factory, just like his father. At which point Lowell informed him that he would be better off attending HBS than MIT. Lowell then introduced him to Donham, who—no shocker here—concurred. The young man enrolled at HBS as a special student in the spring of 1921.

  Doriot never completed the two-year MBA, leaving in late 1921 for a job at an affiliate of investment bank Kuhn, Loeb & Company. He spent four years there but Donham lured him back to HBS with the post of assistant dean in 1925. Doriot’s first experience teaching students came as a result of an offhanded remark he made to Donham about how a colleague’s teaching of the Taylor System wasn’t up to par. Donham removed the teacher and told Doriot to show him how it was done. The experiment was a success. Doriot was promoted to associate professor of industrial management during 1925–26, at which point he developed an entire course, Manufacturing Industries. In the fall of 1927, 140 students enrolled, a 50 percent increase over the previous year. The next fall, Donham asked him to take over Business Policy, the required capstone second-year course, and its 330 students. In the fall of 1929, Donham promoted him again, to full professor. He was only thirty years old.

  Doriot was legendary for his sharp tongue. He hated the New Deal, and everyone knew it. Like many of his colleagues, he was dismayed by what he saw as a sudden and aggressive reach by the federal government into business affairs, telling one reporter in 1932 that “American businessmen are now handicapped as a consequence of the stupid regulation which now exists.”3 In a 1934 speech, he even offered up a little of that HBS elitism that Donham loved so much: “[Sooner] or later we must come to the conclusion that those who pay the taxes have more right to govern than those who don’t.” (Democrats latched on to the remarks for electoral success. Doriot, realizing the mistake of expressing such sentiment out loud, kept such thoughts to himself from that point forth.)

  He wasn’t afraid to take aim at powerful vested interests, either—up to a point. In the aftermath of the stock market crash of 1929, he wrote a caustic white paper titled “The Investment Trust Racket,” in which he accused Goldman Sachs and the well-known investor Waddill Catchings of creating a number of financial entities for the sole purpose of defrauding investors.4 Doriot never published the paper, a decision his biographer credits to his “cautious nature” and a fear of the legal implications as well as reactions within Harvard itself. Another way to think about it: Whatever his private thoughts, he was too smart to publicly bite one of the hands that fed HBS.

  Better at making friends in high places than criticizing them, Doriot served on the boards of twenty companies between 1932 and 1941, and held executive positions in ten others.5 But his contacts extended well beyond the corporate realm, most notably to the military.

  Doriot’s first involvement with the U.S. armed forces was helping the War Department get a handle on its expenditures in the late 1920s. In 1932, he gave a speech, “Industrial Mobilization in a Major Emergency,” at Baker Library to officers from a number of branches of the armed forces.

  As the world slowly came to grips with the prospect of another world war, Doriot was forced to come to grips with something much more personal. If he wanted to make real contributions to a war effort, he needed to become an American. That happened when William Donovan, a distinguished World War I commander who later founded the Office of Strategic Services, invited Doriot to meet with President Franklin Roosevelt. The president asked Doriot if he was ready to help his country. Doriot said yes, and on January 8, 1940, received his citizenship in a Boston courthouse. The next July, he was commissioned as a lieutenant colonel in the Quartermaster Corps Reserve.

  Over the next several years, Doriot was a crucial player in U.S. industrial policy, working with the likes of John D. Hertz (of Hertz car rentals) to help the automobile industry scale up to wartime capacity, including pressuring executives at the likes of Ford and General Motors to convert plants to wartime manufacturing needs. He advocated for gas rationing to conserve crucial rubber resources, as well as the making of synthetic rubber in its stead. In 1942, he was named chief of the Resources Division—the forerunner to the R&D group of the Quartermaster Corps—and put in charge of all national problems of production, materials conservation, and design specification.

  It was in that role that Doriot found his true gift, which was to help spot, fund, and build innovative products and companies. He led the charge for innovation in war, and helped bring into being novel items such as water-repellent fabrics, cold-weather shoes, and nutritious food served in compact form—the so-called C- and K-rations. (He also oversaw the development of a lightweight plastic armor, Doron, that was named in his honor.6)

  In October 1943, Doriot was named director of the entire Military Planning Division. As one story has it, in late 1944, with U.S. troops seemingly on the verge of victory in Europe, General Dwight D. Eisenhower cabled him with a recommendation to begin dialing back the rate of industrial production. Doriot thankfully ignored the suggestion, because when a surprise German offensive resulted in the Battle of the Bulge, American troops still had a full pipeline of necessary supplies. “Thanks in large part to Doriot,” his HBS colleague Vernon Alden later said, “we had the supplies we needed to regroup and go on and win the war.”7

  In February 1945, Doriot was promoted to brigadier general. That August, Major General Robert B. McClure wrote Doriot to congratulate him personally “on the very superior work that you have done in supplying the most durable and comfortable equipment that could be devised. . . . Without question, the U.S. Forces in this war were the best fed, the best clothed and equipped troops in all military history.”8 That October, he was awarded the Distinguished Service Medal, the highest honor given to noncombatants. Released from the Quartermaster Corps in May 1946, he was known as “the General” from that point forth.

  The war made Georges Doriot a venture capitalist of sorts, but peacetime gave him the opportunity to be a real one. In June 1946, MIT president Karl Compton gathered a small group of New England power brokers—Merrill Griswold (the chairman of Massachusetts Investors Trust), Vermont U.S. senator Ralph E. Flanders, and Donald David (the newly appointed dean of HBS)—and launched the American Research and Development Corporation (ARD). They raised $3.5 million in December 1946, the first venture capital firm to raise its money from public sources. (They’d wanted to raise $5 million, but those public sources would not cooperate.)

  Hamstrung by his army commitments, Doriot was only able to chair
the firm’s board at first, while Joseph W. Powell Jr. (’26) was named vice president. (Among other things, ARD would prove a genuine source of new jobs for HBS grads over the years, specifically Doriot’s former students.) The firm’s investment guidelines will sound familiar to students of venture capital today: Projects had to be past the “test-tube stage,” products had to be protected by patents or other knowledge barriers, and there had to be an attractive outlook for future profits. Taking a page from the “Private Entity with Public Pretensions” playbook used so effectively by HBS throughout the years, Senator Flanders told Doriot about how he responded to questions about the entity’s small staff—by suggesting that ARD was not, in fact a private company, but a social movement: “My answer is that my staff is the United States of America.”9 When Flanders was elected to the Senate, Doriot took over the presidency of ARD.

  At that point, Dean Donald David made an exception to HBS’s longtime rule specifying the amount of time HBS professors were allowed to engage in outside work. Whereas in the past, teaching had to make up a clear majority of a professor’s time, for Doriot the equation was reversed. He taught on Mondays and Tuesdays at HBS and spent the rest of the week at ARD. But it was rough going at first. ARD’s first investment, a degreasing gun, was a loser—without much to show for its efforts save a lot of red ink. In 1949, without enough capital gains from its investments to keep the operation internally funded, ARD went back to the public markets, only to be rebuffed again: An effort to raise $4 million brought in barely more than $1 million.

  By 1951, combined sales for ARD’s portfolio companies hit $40 million and employment to 3,000. Such numbers pale in comparison to those of private equity giant Blackstone in 2015—$90 billion in sales and 616,000 people employed—but progress was progress, even if the public markets remained unimpressed; the shares hit an all-time low of $16 in 1953. In January 1954, ARD paid its first-ever dividend in hopes of keeping investor interest from dying completely. Later that year, investment bank C. E. Unterberg, Towbin added insult to injury, referring to the stock of the company that invested in growth companies as a value play.

  Everything changed in 1957, when ARD staked MIT engineers Kenneth H. Olsen and Harlan Anderson with $70,000 in exchange for 70 percent of the equity of their company, Digital Equipment Corporation. The two men had seen an opening in the computer hardware space for developing a cheaper alternative to the then-dominant IBM mainframe. DEC went on to make history, both as a disruptive company and as an investment. The first salesman hired by the company: former Doriot student Ted Johnson (’58).

  (As if Doriot weren’t busy enough, he also spent the tail end of the 1950s helping to create the first European graduate business school, INSEAD, to prepare European businessmen for the European Common Market, which he saw as inevitable. As was his wont, he corralled former students to the cause, including Olivier Giscard d’Estaing, the brother of the future president of France. The school, which benefited from unlimited access to HBS cases as well as financing from the HBS-infiltrated Ford Foundation, opened its doors in Fontainebleau, France, in the fall of 1959 with 62 first-year students enrolled. Time magazine called it “Harvard in Europe.”)

  As the 1960s unfolded, Doriot invested with vigor, including a $750,000 stake in Textron Electronics and another in electronic test equipment pioneer Teradyne. In a demonstration of the long arm of the HBS network—if you don’t have a first-degree connection to someone, you probably have a secondary one—he also backed Zapata Off-Shore, a maker of offshore rigs headed by war hero George H. W. Bush. (Bush the elder did not attend HBS, but his son and future president George W. Bush did.)

  In 1960, a feature in Barron’s credited Doriot with much of the firm’s success. In 1961, ARD listed its stock on the New York Stock Exchange, the first-ever venture capital company to do so. And the message Doriot had been repeating for years began to be heard: While the best investment opportunities are also the riskiest, if you make them systematically, you can eliminate part of that risk. He was teaching the world Venture Capital 101.

  In 1963, Time magazine ran a profile, “The Profit-Minded Professor,” which called him “the dean of the businessmen-professors” and quoted Doriot describing his job as to “watch, push, worry, and spread hope.”10 In 1965, BusinessWeek did likewise, claiming that Doriot’s successes proved “that theories can be converted into profits.” Alas, the general’s huge and growing acclaim did not prevent the inevitable, which came in the form of a March 1965 letter from Harvard president Nathan M. Pusey informing him that he would be involuntarily retired as of August 31, 1966.11

  But he would retire in glory: DEC went public on August 19, 1966, at $22 a share, valuing ARD’s original $70,000 stake at $38.5 million. When ARD finally liquidated its stake in the company, it was worth more than $400 million—the venture capital industry’s first major win. But it was more than that: DEC helped make Boston’s Route 128 the Silicon Valley of the East Coast before there was even much of a Silicon Valley of the West. Doriot’s ARD invested in more than 120 companies, delivering a 17 percent annual return over twenty-one years. His lieutenants went on to found many more, as did former students such as Thomas Perkins and Frank Caufield, two of the cofounders of Kleiner Perkins Caufield & Byers.

  Doriot biographer Spencer Ante pinpoints Doriot’s biggest misstep: He failed to groom a successor. In particular, his longtime lieutenant William Elfers left ARD in 1965 because he was convinced that Doriot, even though he was approaching seventy, wasn’t about to step aside. (Elfers later formed his own hugely successful venture capital partnership, Greylock Partners.) By the time the company was folded into Textron in 1972, it was clear that the singular reason that the company had prospered—Georges Doriot—was also the singular reason behind its eventual demise. Like so many tragic protagonists in HBS cases, Georges Doriot had flubbed handing over the reins.

  But he still left a legend. As Robert Finkel writes on the very first page of The Masters of Private Equity and Venture Capital, Doriot “created a way of thinking and operating in business: pooling investors’ money and deepening its impact by putting discipline, accountability, and a sense of purpose to work on its behalf. . . . By harnessing the capital and commitments needed to support innovation, [he introduced] a new chapter to the history of capitalism.”12 When a couple of policy changes made venture investing a more wide-open field—the reduction of the capital gains tax from 49.5 percent to 28 percent in 1978 and the clarification of pension funds’ “prudent man” investing rule in 1979—the industry took off like a rocket. But the rocket had been built by Georges Doriot and his contemporaries.

  Doriot often said that he treated his investments like children, and that the return on those investments was a by-product of the relationship, not its point. “When you have a child, you don’t ask what return you can expect,” the childless professor told Fortune magazine in 1967. “If I were a speculator, the question of return would apply. But I don’t consider a speculator—in my definition of the word—constructive. I am building men and companies.”13 No matter; when Doriot died in 1987 at the age of eighty-seven, he was worth more than $50 million. In 1979, Fortune named him to the National Business Hall of Fame.

  And what of his teaching? He was, by near-unanimous acclaim, the most popular HBS professor of his time, despite the fact that his most enduring course, the second-year elective Manufacturing, was one of the most difficult that MBAs faced. Among the seven thousand students who took the two-semester course of lectures and fieldwork—Doriot was one of the few HBS professors able to ignore the mandate to teach via case study—many went on to carve their own names in the annals of American business history, including Philip Caldwell (Ford), John Diebold (Diebold Group), Ralph Hoagland (CVS), Dan Lufkin (Donaldson, Lufkin & Jenrette), Fred Smith (FedEx), James Henderson (Cummins Engine), Henry Schacht (Lucent Technologies), and James D. Robinson III (American Express).

  Doriot’s advice for HBS students wasn’t confined to finance or m
anufacturing. Scores of students remember his bon mots, from how to dress (“Sport coats are for newspaper boys and college boys”) to the inaction of committees (“A committee is an invitation to do nothing”). He even ventured into the coining of aphorisms, some of which were essentially truisms (“An average idea in the hands of an able man is worth much more than an outstanding idea in the possession of a person with only average ability”) but others of enduring insight (“Be wary of investment bankers; they’ve got a totally different view of the world,” and “Somebody, somewhere, is designing a product that will make your product obsolete”).

  Georges Doriot was also one of a long string of HBS professors who stressed the importance of understanding everything about a company. Whereas later generations of Harvard MBAs emerged from the School understanding little more than their desire to use financial engineering in order to become rich, Doriot demanded that his students study not just a company’s inputs and outputs, but the relationships that made it work as well. “He had more influence on what has happened in American business than the rest of the Harvard faculty put together,”14 said Zalman Bernstein, founder and chairman of Sanford Bernstein & Company.

  14

  A Decade in Review: 1930–1939

  In 1915, the New York Times ran an editorial in support of college-educated businessmen: “We are confident that the young man with a college education is better fitted for advancement in modern business than the one who begins at the foot of the ladder with small learning.” It was a bold call, given that from 1900 to 1909, only 19 percent of founders, CEOs, and founders’ successors at large public corporations were college educated. But it was also correct: By 1930 to 1939, that proportion had risen to more than half, or 52 percent.1 And Harvard Business School was leading the charge.