Interviewed October 22, 1994
Concord Oral History Program
Renee Garrelick, Interviewer.
Click here for audio in .mp3 format
At the time when the world's first man-made satellite Sputnik was launched by the Soviets in 1957, this area had a very unique potential in terms of the interaction between academia, government, and industry. But the very innovative research and creative entrepreneurial capabilities that existed needed investment capital to convert them into businesses. You certainly were a pioneer at the time, aggressively investing in companies in your capacity as loan officer at the Bank of Boston.
We're talking about the period of time of 1958 into the mid-1960s when I was not investing in companies but lending money from the First National Bank of Boston to these emerging companies that were technologically based. Many of these companies were spin-offs from MIT and Harvard. The most famous department at MIT at that time was the instrumentation lab, Stark Draper Lab. They had any number of assistant professors and professors spun out of the laboratory to do individual contracting work for the U.S. Government. Most of that contracting work was to close the technological gap between the United States and Russia.
These small spin-offs dominated Cambridge. You could go along the streets in back of MIT and garage after garage would be filled with assistant professors and some of their doctoral students doing contract research under their own name for the federal government. This was allowed by MIT at that time; it's not allowed now. Those small spin-outs were financed initially by loans. The department that I started at the First National Bank of Boston, High Technology Lending Group, lent those small companies funds. We secured the loans by taking the contracts as collateral, the contracts between the Bureau of Ships, or the Air Force, or whatever it might be, as collateral and made our loans against them. When the contracts were done and the work completed, the loan would be repaid, and then the company would go on to the next contract.
I didn't start to invest in these companies until in 1961 when I went to Bessimer Securities and became the head of their venture capital area in New York City. At that time, I thought investing in the companies would be, as a permanent investor, considerably more rewarding than simply lending them money for contract research, so that's why I chose to go into the investment end. It wasn't until then that I invested in these small businesses.
I was young at that time and was just infused with the excitement of the formation of these new businesses. You've got to remember that when I got out of graduate school, Harvard Business School, in 1954, New England was in awful shape. The textile and the shoe industry had left Massachusetts. We had an unemployment rate in 1958 at something like 13%. This was a very, very depressed area. And it depressed everybody, not just those that were out of work, but those who had to live here. It was not a very happy time.
When this contract research came as a result of Sputnik into this area, there was a burst of energy. If you were young and wanted to do something important, it was a great opportunity for a lot of people to move ahead. So rather than the depression we had in the middle ‘50s, we had this surge of economic growth in the ‘60s, and everybody's spirit rose and it was a happy and exciting time. Of course, we did close the technological gap between Russia and America because of the technology that came out of MIT, Harvard, Stanford, and Cal Tech-Berkeley. That was the real surge of technology. It was the conversion of science to technology to useful product for an application to accomplish a specific thing which was to narrow the technological gap, and it succeeded.
A unique area around Route 128 was formed as a result. The first area of expansion was all that territory behind MIT, and then the road became important. It was a sign of success when you moved away from MIT to Route 128. Bear Hill Road in Waltham was one of the first developments in that area. There were a lot of small companies that sprung up around Waltham. A lot of old industrial space was filled up with these small companies, the Waltham Watch Factory, Maynard mills became the home of Digital.
It wasn't any stroke of genius to know the potential of these companies. The fact is that the banks at that time were doing the same kind of thing they did for generation after generation. They were financing old and established businesses, and they were not looking for tomorrow's business. There was only one thing that differentiated this area from any other area around the country and that was the brains, the brainpower we had. It seemed to me that that comparative advantage we had over others would eventually differentiate this area from other regions of the country and that it would behoove the banks to finance the growth of knowledge-based industry. I didn't think that was a particularly radical thought, but it was radical for a bank evidently. I fought that policy through the First National Bank of Boston and it was accepted, but I never considered it being radical, it was just logical. You finance in an area that would give you a comparative advantage over others, and what we had were the brains.
The policy paper that I put to the management of the bank proposed we would allocate a rather modest amount of lendable funds to finance these knowledge-based industries, that we would try to capture the market, sort out those companies after we had captured that market that we thought really had potential, and let the other banks have what we discarded. So we did develop the best group of companies that came out of this region. It was a policy decision to get these companies in the fold, we'd loan them more money at a lower rate then any other bank, and that got us the business. We kept what we wanted and we let go what we didn't want a year or two years hence and we ended up with a very high quality portfolio. That was a dedicated policy that the bank stuck with for about 10-15 years. It won them all this business.
The one company I identified most with was Wang Laboratories, and I did finance that company in 1959 in Cambridge, when it was right behind MIT in a little, tiny lot. I financed it on its way out to Natick at the Natick Industrial Park, and then when it opened in Tewksbury on Route 495, and then continued with it as it came down to Lowell. Damon Engineering was another one that was in the clinical testing laboratories, a very successful company. Unitrode, which is the only semiconductor company still in Massachusetts, has gone through a reorganization, but I was an investor in that company in 1961 and went on its board in ‘61 and have been on it's board ever since. That's a long time to be on a board - 33 years. There were many others but those are the ones that I still remain with. Actually a company that I financed out in Groton has grown to be a very large company called New England Business Services.
When I joined Bessemer Securities in 1961, I made the switch into venture capital. That's when I became an investor and a director. In the bank, you lent the money and the loans were paid back and you were a third party provider of debt capital to a business. It wasn't until I got to Bessemer that I was a part-owner of those businesses and went on the Board of Directors to help build those small enterprises. I've been doing that ever since.
I never moved to New York. My wife came from this area and we really wanted to live in Concord. We wanted to bring our children up here. My son Peter was born in May of 1961 and that June, I told my wife I was taking a job in New York. That was not a happy announcement. But I never moved. I commuted every week, always with the idea that we were going to move down, but I never could make the move. I made the best decision in my life in 1962 when I said to my employer, Bessemer, that I was better off in Massachusetts. So I started to build myself all over again at Tucker Anthony.
My firm TA Associates began in 1967 and became one of the dominant, if not the dominant venture capital operation in the United States, with a handful of others, but it was an industry leader. I always had an international perspective and always thought that we could replicate in other parts of the world what TA Associates had done here. I started investigating the possibility of doing that in 1971 and 1972. Arthur D. Little was given a contract by the French Ministry of Industry called the Route 128 contract, which was to investigate what forces created technological development around Route 128. That was the purpose of the study. Arthur D. Little subcontracted to me the section on venture capital and the role venture capital played in the development of these high technology enterprises. Through that contract I got to know the Minister of Industry in France and his deputy, and that study proved that venture capital did have a very vital role in the building of these enterprises, and a venture capital industry was encouraged by the French government in 1972. I became a director of a venture capital company called Sofinnova. TA Associates became an advisor to the management of that company. I opened an office in Paris and we were at that time giving advice not only to Sofinnova but to the government as well. From that base we consulted to the Deutsche Bank in Germany and to the Swedish Development Bank and others who were interested in venture capital as a developmental tool. So it gave me exposure, and it gave me a chance to get to know what people were or were not doing in technology investing in Europe.
The conditions were not right for the beginning of venture capital operations in Europe. It was a very stagnant period. There was a move towards socialism and nationalization of industries. There was a common perception that the individual himself had very little to do with technological advancement, that the organizations would do it, whether they would be privately owned or governmentally owned. The idea that the individual could really invent something of significance never occurred to those people. It wasn't until the late ‘70s, 1979, that the bankruptcy of their ideas became apparent. The technological gap between the U.S. and Europe had widened, as well as with Japan. The accepted wisdom was to prop up employment that was redundant. The French were maintaining a stale industry that was not competitive on a world basis and employing hundreds of thousands of people doing it. After a while, it became obvious that that was not necessarily the right way to spend the taxpayers dollars, so a change of attitude occurred in the late ‘70s. The introduction of Margaret Thatcher in Great Britain, and the idea of privatization rather than nationalization took place. That created a whole different attitude towards venture capital and the idea that the financing of technology-based small enterprise could in fact be successful.
With that change in attitude we were in a position to replicate TA Associates first in Britain and then throughout Europe. TA Associates was very, very successful and is a domestic venture capital company. I started these replicas of TA Associates in every European country and along the Pacific rim and all the way from Japan to Australia. Those affiliates grew in number and in complexity, and it was obvious that I couldn't manage all of that business inside of TA Associates. Consequently, what we did was to spin the international business out of TA Associates into a separate company called Advent International Corporation. Advent is now the one that runs the non-U.S. side of the business. We do U.S. investing as well but the fact is that it is an independent company, whose main activity is to provide investment opportunities on a global basis to investing institutions. It's grown from nothing in 1985 to now managing a billion, 500 hundred million dollars of assets in 25 locations around the world.
Going back a little bit to 1971 when I started TA Associates. TA Associates became the manager of a venture capital program. That was followed by another venture capital program in 1972. We worked for 10-11 years before any substantial gains were realized. It wasn't until the late ‘70s that public offerings of these technology-based companies became prevalent. Up to that time, there was no public market. We're talking about the ‘70s -- the end of the Vietnam period, Watergate, inflation, recession. We're talking about the worst period for anyone to be in business. It was just depressing for everyone to come home. We came out of that trough in the late ‘70s, not just emotionally but with the stock market as well. One is really the mirror of the other. If people are positive about their lives, they're positive about stocks. That's just the way things go.
At the end of the ‘70s, we shook off the lethargy that was in that period and started to get back into the real life. This resurgence of the stock market at the end of the ‘70s allowed us to take these companies that we had invested in publicly and to make substantial gains. Through the ‘70s we were working on our portfolio companies, adding value to them, but that value wasn't reflected in higher prices. It wasn't until the late ‘70s when the stock market kicked in that we realized these gains, and then the gains were substantial. So that very active stock market period in ‘79, ‘80 and ‘81 allowed our investors to cash out quite handsomely. That substained the venture capital industry into the ‘80s and through the ‘80s.
There are two things that impact the economy here. One is defense spending and the other is the technological move away from the markets that we dominated. You've got to remember that the ‘70s, late ‘70s and the ‘80s, were the eras of the mainframe computer and the minicomputer, and this was the center of the minicomputers. The leaders of industry, Wang, Ken Olsen at Digital, Ed DeCastro at Data General never really realized what the personal computer could do, that it could be used as a powerful work station. The reason that they didn't realize that is that this had never been the center of semiconductor research. When we lost the semiconductor technology to California in the ‘60s and ‘70s, it was the most grievous loss, worse than the textile industry, worse than anything else. The technological knowledge of what the semiconductor as a device and its application can do has allowed California to first catch up and surpass us as a technology center. We never realized in the ‘80s here what the semiconductor could do. We never realized that chip would allow the personal computer to become a work station that could compute to the extent that it has now. That advance obsoleted virtually everything that had been done in the minicomputer area in the ‘80s and has led to the bankruptcy of Wang Laboratories and the downsizing of Data General and Digital Equipment. You add that to the conversion away from defense to industrial, and that conversion will take a long period of time, you got a recession that will be with us a long time.
There are pockets of unemployment in this state that will not recover in this generation, like Lowell and other parts of this state where the minicomputer and defense industry was. There's depression in those areas, the recession depression in those areas. But there is a tremendous amount of growth in the computer software area, and there has been a great growth in financial services. So the figures overall give us an employment rate within the state that is acceptable. But there is a great variety of experiences between some locales and others. Overall, the figures look pretty good, but there is still devastation in a Lowell or another area that depended upon manufacturing of hardware or military hardware.
We are going through a financial revolution and we've got to adjust to it. What bothers me a tremendous amount is the political rhetoric of this election period. There is evolution. You evolve, I evolve, a business evolves. A business is a biological thing, it is made up of people who get together and do things. If they do things productively and change with the period of time, they will be in business for a long period of time. If they don't make those very difficult adjustments, they won't be in business. Divisions of companies have to be downsized, divisions of companies have to be closed, so that the resources can be put into productive sectors that then will grow in the future, that's evolution. To deny that is a basic failing, and unfortunately, it's surfacing in this election.