A Proposal to American Research and Development
Ken Olsen / Harlan Anderson · 1957
"A small team could sell profitable digital circuit modules first and interactive computers later, at a moment when investors were sure computers were a money-losing business."
In 1957, two MIT Lincoln Laboratory engineers, Ken Olsen and Harlan Anderson, wanted to build smaller, cheaper computers to challenge IBM's expensive mainframes. IBM and other established players had already turned them down, and at the time 'the computer business' was widely seen by investors as a money-loser — only giant, well-capitalized companies could survive it. So instead of asking for money to build computers, they proposed building profitable digital circuit modules first, using that revenue to prove the team and the technology worked, and only later building full interactive computers. American Research and Development Corporation (ARD), one of the first venture firms in the US, funded them: $70,000 in equity for 70% of the new company, Digital Equipment Corporation, plus a further loan.
The mechanism here is sequencing risk to match what investors could actually stomach. A direct pitch — 'give us money to build computers' — was, at the time, effectively unfundable, because the category itself had a bad reputation with capital allocators. By proposing a lower-risk first product (circuit modules, already known to be sellable and profitable) that would generate real revenue and de-risk the team's execution ability, Olsen and Anderson gave ARD a way to say yes to something that looked like a normal, provable business, while quietly building toward the bigger and riskier ambition. DEC's PDP series of minicomputers later undercut mainframe prices by an order of magnitude, and ARD's $70,000 stake was worth $355 million by 1971 — the return that made the entire ARD fund look successful, and helped convince other institutional money that venture capital as an asset class could work.
Why did Olsen and Anderson pitch selling circuit modules before pitching interactive computers?
Read more about the topic
The explanation above is written with AI assistance. These are the originals — go to them to check it.
- American Research and Development CorporationWikipedia
- Ken Olsen — PDP-1 Restoration ProjectComputer History Museum
Fairchild Semiconductor Founding
"Eight scientists who walked out on Shockley could build a silicon-device company if anyone would back them; about 35 corporations were approached and every one passed."