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Innovation Economy

A personal take on the rise and fall of Digital

By Scott Kirsner
Globe Correspondent / October 26, 2009

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Highlights from Scott Kirsner’s Innovation Economy blog. For the full blog, visit www.boston.com/innovation.

Harlan Anderson turned 80 this month. With Ken Olsen, he started Digital Equipment Corp., which was one of the pillars of the Route 128 era in Massachusetts and at one point was the second-biggest technology company in the world, after IBM. Next month, his memoir (“Learn, Earn & Return: My Life as a Computer Pioneer’’) will be released.

Oh, and he also started blogging recently.

I spoke with Anderson earlier this month to ask him about becoming an author, meeting (and later parting ways with) Olsen, how they raised money for the start-up, and what he views as the Achilles’ heel that undermined DEC.

Anderson met Olsen working at MIT’s Lincoln Labs in the 1950s, just as that military R&D group was being formed. “He was my first boss,’’ Anderson says. The duo wound up working together on the TX-2, an early transistor-based computer. Olsen “had a lot of charisma, and a practical sense of how to go about things,’’ Anderson says. “He didn’t seem like an academic who wanted to stay in the ivory tower forever.’’

Olsen and Anderson left MIT in 1957 to start a company that would design computers that took advantage of the shift from vacuum tubes to transistors. After they sought funding from defense contractor General Dynamics and were rejected, Anderson writes:

“We continued to consider other sources of financing and next made a visit to the Small Business Administration office in Boston - naively thinking that one went in, made a proposal, and they just gave you money. That was not the way it worked, of course. However, they were very helpful in intro ducing us to the concept of venture capital, which was neither well-known nor widespread at the time. In fact, as far as we knew, there were only three organizations engaging in this type of financing at the time, not counting individual wealthy angels like Laurence Rockefeller: American Research and Development Corporation (ARD) in Boston and two other firms in New York.

“We learned that in order to present a business plan to possible sources of financing we needed to provide pro forma financial statements, which contained projected profit and loss, balance sheet and cash flow. We knew nothing about any of this. We were truly naive in the business world, but we were eager and willing to learn. So we spent many more lunch hours at the Lexington Public Library poring over Standard & Poor’s and Moody’s investment reference books to see what this kind of accounting information looked like for industrial corporations.’’

When Digital first took money from American Research and Development, Anderson writes, ARD invested $70,000 for 70 percent of the company. “This deal seems ridiculous and unfair by today’s standards; however, we never contacted an alternative source of capital,’’ Anderson writes. “We were very naive and there was very little venture capital money available then. We accepted the offer without any negotiation.’’

I told Anderson I’d recently been to the mill complex in Maynard where Digital was long headquartered, and that it was still full of interesting companies. “We paid 40 cents a square foot - annually,’’ he recalled. “And that included heat, parking, utilities, and watchman service at night. We thought we had one heck of a deal. That was cheap, even for those days.’’ But it was hardly Class A office space, Anderson said.

In the book, Anderson discusses his split with Olsen - a bit of history I’d never really understood. MIT professor Jay Forrester was on DEC’s board, and was perennially concerned that DEC was growing too fast. Anderson tended to agree. “We had good engineers, but they’d get overcommitted, and then the boom would be lowered on them,’’ he told me. He met privately with Forrester and shared information with him that Olsen had tried to withhold. “That was the end for me. [Olsen] viewed it as disloyalty, and he didn’t want any criticism from anybody.’’ Anderson was pushed out of Digital in 1966 and Forrester left the board that same year.

“It was the greatest disappointment of my life that the falling-out occurred,’’ Anderson said. (Unfortunately, Olsen has never written a memoir, and I wasn’t able to get in touch with him to seek his responses to the material in Anderson’s book.)

Anderson went on to become the first science adviser for Time Inc., to serve on the board of Boston-based publisher International Data Group, and to make venture capital investments.

At its peak, DEC employed 140,000 people worldwide. Olsen was replaced as its leader in 1992, and in the late 1990s many Digital businesses were sold off, culminating in the sale of the company to Compaq in 1998.

Part of Digital’s decline, Anderson says, may have been the company’s reluctance to embrace common industry standards as they emerged. “Digital was still hung up with the idea that everything had to be their own proprietary technology, whether it was software or chips.’’

But he views Digital’s lasting achievement as “bringing the cost of high-performance computers down in the price range where they could be used for lots of things that had been uneconomical before.’’

Some have called American Research and Development’s investment in DEC the “first home run’’ for the venture capital industry; the firm’s initial investment was repaid roughly 500 times over. “Was it the success of the company, or the outlandish deal they got?’’ Anderson asked rhetorically. “I think it was both.’’

Scott Kirsner can be reached at kirsner@pobox.com.