How The Legendary VC Arthur Rock Evaluated Startup Founders

Arthur Rock’s name is tied to early Silicon Valley, that’s why he thrones among our collection of VC quotes. A decade before Don Valentine founded Sequoia Capital and Eugene Kleiner and Tom Perkins founded Kleiner Perkins, there was Davis & Rock, Arthur Rock’s venture capital firm. Back then, pension funds couldn’t invest in VC funds, so Rock had to raise his first few million dollars by convincing a dozen private investors one by one. He put that money to good use, helping build Intel (where he was on the board for over 30 years), and investing in companies like Scientific Data Systems, Teledyne, and Apple. How did this blue-blood Silicon Valley VC pick the Founders he invested in? Like most elite Venture Capitalists, Arthur Rock knew that their mindset was the key to entrepreneurs’ success.

In This Article

Who Was Arthur Rock?

Arthur Rock, a pioneering figure in Venture Capital, played a pivotal role in shaping Silicon Valley’s VC industry. His journey began in New York as an investment banker with Hayden Stone, where he facilitated the formation of Fairchild Semiconductor by uniting discontented scientists from Shockley Semiconductor, famously known as the “Traitorous Eight.” This venture laid the foundation for Silicon Valley’s entrepreneurial ecosystem.

Before the PayPal Mafia, there were the Traitorous Eight. The traitors included Gordon Moore & Robert Noyce (who co-founded Intel) and Eugene Kleiner (who co-founded Kleiner Perkins).

In 1961, Rock co-founded the Venture Capital firm Davis and Rock, which invested $3 million and yielded returns of $100 million between 1961 and 1968. His investment philosophy emphasized backing talented individuals over specific ideas, leading to the success of companies like Intel and Apple. Rock’s approach was characterized by simplicity and trust, often formalizing deals with minimal documentation.

Rock’s contributions extended beyond funding great companies. He was instrumental in establishing the 80-20 profit-sharing model prevalent in Venture Capital partnerships. His insights into the semiconductor industry’s potential and his support for employee stock options fostered a culture of innovation and ownership among tech professionals. Refer to the articles below for more on carry and ESOPs.

Arthur Rock’s legacy is evident in the thriving tech industry of Silicon Valley, which continues to be a hub for innovation and entrepreneurship.

How Arthur Rock Evaluated Entrepreneurs

In 2007, when he was already in his 80s, Arthur Rock spoke at the Computer History Museum in Mountain View. Luckily, the conversation was recorded and transcribed. Reflecting on his career, Arthur Rock expressed a preference for investing in people over ideas, valuing the capabilities and vision of entrepreneurs.

It may not seem suprising for us today, as we live in a Founder-friendly era where VCs compete for entrepreneurs’ love. But Investors in the 1960s didn’t have the same culture.

Arthur Rock didn’t start out thinking like a Venture Capitalist—at first, he acted more like a Wall Street banker. But when asked how he chose the entrepreneurs he backed, Rock said it all came down to the people. He wanted to see if Founders had what he called “fire in their belly and intelligence.” He asked them the same questions multiple times and watched if their answers stayed honest and consistent.

I’m not enough of a technologist to be able to understand what
most of these entrepreneurs are about technically. And the way I went about it was to spend a lot of time with these would-be entrepreneurs.

Arthur Rock (Source: Computer History Museum)

Arthur Rock looked for people who saw reality as it was—no spin, no inflated promises. He distrusted “promoters” who just wanted to make a deal, and he criticized the hype of the late-1990s Internet Bubble.

That skepticism is still relevant. Many of today’s Founders grew up during a VC bubble and came to believe entrepreneurship was a get-rich-quick-scheme.

Money is never a good entrepreneurial driver, as I explained in this article.

Go Further: Is Money The Main Driver of Successful Entrepreneurs?

Are Entrepreneurs Delusional?

One of the primary personality traits I repeatedly observed over the years in entrepreneurs, both successful and unsuccessful, was a tendency to live in denial. Of not seeing things as they were, to paraphrase Arthur Rock.

I vividly remember a story over a decade old, but that stuck with me until now, and no doubt prodded me into embarking on my doctoral work on the psychology of entrepreneurs. I was helping out a fintech entrepreneur who had not succeeded in raising funds due to an oversized funding ask. (I talk about it in more detail in my webinar: Don’t Ask Venture Capitalists Too Much Money – Here’s How To Size Your Funding Round.)

So many stress factors would petrify any “normal” person. It would have been much easier to give up and fold the company rather than trying to salvage any value and secure jobs for all his employees.

Maybe it was sheer grit, pride, or a sense of duty. Still, the Founder kept pushing, and we ended up finding an arrangement with a prominent market player who believed in the product and agreed to acquire the startup and inject cash to develop it.

At the time, I believed what had saved the entrepreneur was his ability not to see things as they were. His capacity to deny what was objectively a scary situation eventually proved advantageous.

One predominant explanation for entrepreneurs’ optimism is overconfidence in their knowledge, ability to predict the future, and general personal abilities.

Barbosa, Fayolle, & Smith (2019)

With the benefit of my research these past two years, I now believe there is another psychological dimension to consider: overconfidence.

Overconfidence, The Entrepreneurs’ Double-Edged Sword

Overconfidence is the belief you will succeed where others fail. It partly relies on a personality trait called self-efficacy: the perception that you will successfully perform a task given your core competencies.

Entrepreneurs have long been diagnosed with both high overconfidence and self-efficacy.

The negative aspect is that they are prone to mistakes such as entering the wrong market or believing there is a market when there is, in fact, none. (Lack of a market is a primary cause of startup death.)

I would argue that overconfidence is even more important than risk appetite in entrepreneurs. The perception of risk in the entrepreneurial context is relative.

Overconfidence vs. Risk: AirBnB

When he set out to form AirBnB (then called AirbedAndBreakfast) with his co-Founders, Brian Chesky didn’t appreciate the risk level of his new venture like others around him did.

He famously pitched dozens of Venture Capitalists to sell them the idea that arranging for people to host total strangers in their homes was not a crazy idea fueled by ingenuity and delusion. Fred Wilson, the legendary VC based in New York, openly wrote about it and let Y Combinator’s Paul Graham publish their email exchange about why he eventually declined to invest.

(These are fascinating forays into the VC’s decision process. Watch my webinar, The 7 Secret Evaluation Criteria Venture Capitalists Use To Make Investment Decisions, for more on that topic).

I thought someone would get raped or murdered and the blood would be on their hands. Airbnb is a $10 billion company I’m not an Investor in.

Chris Sacca (source: Startup)

Other savvy Investors, such as Chris Sacca, passed on the deal. The interesting point here is that the Founding Team appreciated the venture’s risks very differently.

Brian Chesky recently shared that the main risk most people warned him against was trust. “Strangers will never trust another.” But he was confident that it was possible to design a system for strangers to trust one another, as he recalls.

This point of view perfectly illustrates how overconfidence influences risk.

Naturally, other considerations need to be taken into account, such as cognitive biases. Chesky points out that he and his teammates believed people are fundamentally good, a prior heuristic that fueled their desire to build a robust trust system.

“The Worst Idea That Ever Worked”

In a 2015 exchange with Reid Hoffman at Stanford, Chesky relates AirBnB’s early days. The whole video is a must-watch for budding entrepreneurs (and, I would argue, Investors willing to understand the company-creation process). Chesky repeatedly highlights the idea that overconfidence overcomes risk.

Talking about how Airbnb designed the payment system, he reminds the audience that there was no platform at the time where people would pay other people directly. eBay and Etsy both relied on PayPal (whose first VP, Reid Hoffman, is sitting right next to Chesky).

And that was kind of a scary idea. It almost scared us. We decided, let’s just do it.

Brian Chesky

Delusion? Ingenuity? A complete disregard for consequences? I believe most entrepreneurs take on challenges because their self-belief considerably diminishes their perception of the risks involved.

They see things not as they are but as they want them to be.

Aram Founder

Aram is a veteran investment professional with 20 years of experience. He’s realized over 45 transactions across Project Finance, LBO Financings, Growth Equity, Venture Capital, and M&A in half a dozen countries on three continents.

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