Chapter 3 - Data Communications: Emergence 1956-1968
3.7 Euphoric Markets and Venture Capital 1967-1968
The sustained growth economy of the United States that began in the early 1950’s had neither the breadth nor legs to support the policies and actions of the Federal Government during the 1960’s. The simultaneous pursuit of both “guns and butter” – the Vietnam War and the “Great Society” – forced the Government to issue too much money. Perceived by a growing number of professional fund managers as a certain prescription for inflation, they sought new ways to increase their investment returns to offset the erosive potential of inflation.72 To earn higher returns required new investment strategies, one of which was to begin investing in stocks – the New York Stock Exchange (NYSE, or “Big Board”), American Stock Exchange (AMEX), and National Quotation Bureau (later to become NASDAQ) – not solely dividend yield but for price appreciation,. Buying stocks for their growth potential turned into a stampede the day after President Lyndon B. Johnson’s State of the Union Message on January 10, 1967, when the third largest volume of shares traded in the then history of the Big Board changed hands. The day set-off a two-year bull market.
The most desired stocks were the “glamour” stocks or “Houdini issues:” IBM, Xerox, Polaroid and Kodak.73 Stock prices traded as high as fifty times next year’s projected earnings. Investor appetite and willingness to pay high prices for technology companies induced private technology companies to go public in order to raise always-needed cash and create desired liquidity for shareholders. Computer leasing companies proved an immediate favorite. By June/July 1967, investors actions resembled a “speculative orgy”74 according to Business Week with the AMEX up 50% and the NASDAQ up 40% – by August it would be up 70%. It seemed as if all a company had to do was embed “tronics” in its name, and it became a “high-flyer.” The markets peaked in September 1967, then regained momentum in the spring of 1968, opening another market window for technology companies, especially that were computer related.
The “hot” market for technology stocks induced the transformation of venture capital from largely an activity of wealthy families to one of professionally-managed fund partnerships.75 Investors, having made money on their private investments that went public, wanted to reinvest their capital gains in other new, private technology companies. The goal was to achieve ten to twenty times their investment in three to five years. A new breed of venture fund managers emerged in response. Unprecedented sums of money began flowing into venture capital. By 1970, the first year for which records were kept, $83 million was invested, up from maybe $10 million in 1966.
“The market warms up,” Business Week, January 21, 1967, p. 25
“Pension advisors play it cool,” Business Week, April 1, 1967, p. 116
“Speculative spree alarms AMEX,” Business Week, July 15, 1967, p. 36
See the story of one of the most important and respected funds formed during this period, Greylock, in Greylock by William Elfers, Greylock Management Corporation, 1995.