David Morgenthaler, VC who shaped industry, dies at 96

David Morgenthaler, an early venture capitalist who in the 1970s played a critical role securing legislation that shaped both the venture capital and buyout industries, died last month in Cleveland. He was 96.

A founding director of the National Venture Capital Association, Morgenthaler successfully lobbied Congress to slash the maximum capital-gains-tax rate to 28 percent from 49 percent in 1978. The following year he led the effort to establish the “Prudent Man Rule,” an amendment to ERISA legislation that effectively opened the door for pension funds to invest in private equity.

The one-two legislative punch ensured that capital, and jobs, would flow to private companies in the years to follow.

“He pushed the venture industry to have a mission and a purpose,” his son Gary Morgenthaler said, according to The New York Times.

As an investor, Morgenthaler pioneered a hands-on style that eventually became standard across both the VC and buyout industries. He believed he could learn how to do anything, and he used the expertise in mechanical engineering he developed as a student at MIT and later as a commanding officer in World War II to add value to the companies he joined.

His firm, Morgenthaler Ventures, founded in 1968, became one of the few to successfully pursue both venture capital and buyout investments.

In a “Legends of Private Equity” feature that ran in Buyouts in 2010, Morgenthaler pointed to a 1969 investment in Manufacturing Data Systems as his best. After buying in at 22 cents on the dollar the firm sold its shares 11 years later for the equivalent of $64 per share.

His biggest miss, he said, came around 2004 when the firm passed on an opportunity to back YouTube. “That was painful,” Morgenthaler told Buyouts. But he noted that it came “after I had gone emeritus.”

David Morgenthaler was born August 5, 1919, in the small rural town of Chester, South Carolina, to young parents who divorced early on. He graduated from a Florida high school at 16 and went to MIT, starting just after his 17^th birthday. He graduated with a degree in mechanical engineering in 1941 as the U.S. prepared for war.

Morgenthaler’s natural leadership skills were evident early, as was his self-confidence. In college, as president of his fraternity, he brought the organization back from the brink of insolvency. As an intern for General Electric, he would try his hand at welding during his lunch break. Eventually he taught himself the skill using the equipment left behind by the welders.

As a commanding officer in the military, Morgenthaler was known to be strict. Leadership, he believed, was about your “willingness to do things by the book,” he said in a 2011 oral history recorded by the Computer History Museum.

Morgenthaler’s experience at GE and in the military turned him off to large corporations, where he could not rise through the ranks quickly. So he set out to work in startups where he could apply his expertise in engineering.

First, he worked in porcelain enameling, where he was eventually earning more money than the company’s president, thanks to his uncapped sales commission. Later he helped turn a small company, Delavan, into the world’s largest maker of jet engine fuel nozzles.

Starting in the late 1950s, Morgenthaler worked at Foseco, a chemical maker supported by J.H. Whitney & Co, one of the earliest American venture capital firms. As chairman for North America at Foseco, he led a buying spree that transformed the company into an enterprise spanning 57 corporations with operations in 75 countries.

In 1968, Morgenthaler started Morgenthaler Ventures, investing his own money and that of co-investors in startups for the first 13 years. He raised $20 million for its first venture fund from those same co-investors in 1981. “No one turned us down,” Morgenthaler told Buyouts for its 2010 feature.

The firm, which has since expanded into lower-mid-market buyout investing through Morgenthaler Private Equity, has raised $3 billion and backed more than 325 startups. Portfolio companies have included Apple, Ardian, Evernote, Nuance, Promedior, Scioderm, Siri, Synopsys, Transcend, Twelve and VeriFone.

Morgenthaler earned the first Lifetime Achievement Award granted by the NVCA in 1996, the Private Equity Lifetime Achievement Award, and a place in the Private Equity Hall of Fame, among other accolades.

After his eldest son died of cancer in 1989, Morgenthaler began to increase his investments in medical technology. His biggest regret, he said late in life, was never having contributed to the curing of a major disease.

Morgenthaler is survived by his wife, Lindsay Jordan, three children, seven grandchildren, and four great-grandchildren.

Photo of David Morgenthaler courtesy of Gary Morgenthaler.