Chapter 1
Data Communications: Emergence 1956-1968
Modems and Multiplexers
1.7 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. 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. 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” 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. 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.
