Sunday, May 8, 2011

The New 19th Century Venture Model

While Tom Perkins may be considered an early venture capitalist, the necessity for early stage funding of entrepreneurs is of course not new. A recent trip to Akron reminded me to look up an old pitch session which resulted in what would be several rounds of investment in a company that would go on to employee 50,000 people. The story goes back to 1870 when a physician turned industrial entrepreneur Benjamin Goodrich was struggling with a rubber manufacturing company he had started in Hudson New York. The struggle was for a number of reasons, the main being a lack of financing. Some advice from Goodrich’s banking friends led him to Akron Ohio, where Dr. Goodrich gathered a group of successful manufactures and bankers, turned investors, for a pitch session. The pitch was approximately 30 minutes, not too different than an entrepreneur would face on a first meeting with Kleiner Perkins. His idea was a rubber hose company. This was important, he argued, as leather houses cracked. This he felt was a (undefined at the time) disruptive technology. Of the 6 investors in the room 4 invested immediately at very favorable terms to the investors (actually giving them a voting majority) while the other two agreed to a secured loan against the factory that Goodrich would build. The team of investors was lead by a Perkins (not Tom Perkins of course, but Perkins of 19th century Ohio fame).

The story so far sounds not so different from a VC investment of our modern era, where investors count on entrepreneurs for creativity and vision, and a degree of management, while the investors take over a lot of financial risk and interest in the company, as well as provide managerial support, which Perkins did, by finding heads of manufacturing and development for Goodrich. Just to skip ahead a little, BF Goodrich Corporation also had some other traits that a VC of modern times would like. They had double digit profits, and a multi-billion dollar 100X plus exit, with the eventual sale to Michelin. This is where the appeal to the modern VC model would likely end however.

BF Goodrich took 12 years to earn a profit, which was only 2 years before the death of the founder at age 47. During those 12 years of loss Perkins and some of the other early investors kept funding the company, looking towards long-term gain, rather than towards a short term exit. Eventually BF Goodrich would employee 50,000 people, and make that exit, but it would take over 100 years!

This raises a few key questions for me.:
1. Since the company added so much to the American Economy, and was profitable was it a success?
2. Would it have been funded  in today's financing climate?
3. Are Angel Investors the Perkins et al of our time, not the VCs?

I really don’t have an answer, but I do have a sentimental perspective.

In 2008 I was involved with selling my family company Tech Pro to Roper Industries. While negotiations and due diligence went on for nearly 6 months, the final closing of that deal occurred in a beautifully renovated Akron law firm, which was a former BF Goodrich office building where my Grandfather had once worked. While we were signing the exit sale of our 25 year old business, and I was preparing to start a new company, history and responsibility were on my mind. The legacy of BF Goodrich, and of Tech Pro show that things had changed, and now the new company Nanotronics shows even a further evolution of my thinking, towards rapid success. The challenge is not so much in making successful companies but making sure that we know what success is. A quick exit is only successful if it brings wealth to investors and entrepreneurs, while a business is only successful if it brings employment and an environment for creative innovation. On this personal side I look forward to seeing if Nanotronics achieves this, and how that relates to newer models of pressure and financing. Just to be clear, so far Nanotonics is funded by a combination of my family and a group of Angel Investors who are completely supportive in every way. This has made the experiment a success in my mind already as we have been able to employee some extremely talented people, who work very hard towards the vision of creating a large disruptive business. So in that way we are still not much different than Dr. Goodrich when he started his company. I do however hope that profits and success come sooner than 12 years, and that we mange to disrupt sooner rather than later.

1 comment:

Ian Sigalow said...

I wasn't aware of the founding history of Goodrich - it is a great story. Business processes and the size of the economy were clearly much different in the 1800s than they are today, and the capital markets are much more efficient now. I spend a lot of time thinking about the macro factors that effect businesses (which is part of my econ background) and obviously the demand for rubber, vulcanization, and polymer science in the 1940s all played a role in turning Goodrich into a multi-billion dollar company. I think VCs today are every bit as patient as VCs have ever been, although the stakes have changed. In the 1970s and 1980s we had a 5 year holding period culminating in an IPO, and the IPO hurdle was a few million in revenue. Now it is an 8 year holding period and often an acquisition exit and not an IPO. If you want to go public you have to get big fast. And that is hard. This is a longer conversation obviously, but a very thoughtful article on the topic.