The History of Venture Capital
Venture capital, once a term synonymous with startups, has now become a cornerstone of the entrepreneurial world. It's no longer just for finance gurus; everyone seems eager to dive into VC or join a startup.
Since 1974, 42% of companies that went public had venture capital backing. But how did venture capital become such a big deal? Let's explore its history.
1800s-1900s: Banking on Whales
Some trace venture capital's roots back to Christopher Columbus, who got Queen Isabella of Spain to fund his risky voyage to the Americas. In return, she claimed 90% of the profits from his accidental discovery of the West Indies. This deal introduced the concept of "carried interest."
However, Harvard professor Tom Nicholas pinpoints the 19th century, particularly American whaling expeditions, as the real starting point. By the mid-1800s, Americans controlled 75% of the world's whaling ships due to effective financing.
Investors funded these risky journeys, paying sailors a small stipend and a profit share after recouping their initial investment plus a predetermined profit percentage. This early model mirrors modern VC's risk-reward dynamics.
Nicholas even compares whaling returns in the 1800s to venture capital returns from 1981 to 2006, showing striking similarities. Whaling, like VC, thrived on the allure of high but infrequent payoffs.
Banking on Electricity
Another pivotal moment was the rivalry between Thomas Edison, Nikola Tesla, and George Westinghouse over electric lighting. J.P. Morgan, a staunch believer in Edison, heavily funded him and even installed 400 electric lights in his home. This investment paid off when General Electric became one of the original 12 companies on the Dow Jones.
1940s - 1990s: The Birth of Modern VC
Modern venture capital took shape in 1946 with the American Research and Development Corporation (ARDC), founded by MIT president Karl Compton, among others. These pioneers aimed to create an industry, not just a firm, leading to what we now know as Silicon Valley. General Georges F. Doriot, often called the "father of venture capital," was key in steering ARDC toward innovation. They sourced funds from institutions and invested in private companies leveraging WWII technologies. A notable success was their 1957 investment in Digital Equipment Corporation, which grew from $70,000 to $355 million, showcasing VC's potential for high returns.
ARDC inspired others to enter venture capital, leading to the formation of firms like Greylock, CRV, Mayfield, and Venrock. Arthur Rock, a former student of General Doriot, played a crucial role in the industry's growth, funding iconic companies like Intel and Apple.
The Iconic Sand Hill Road
The 1960s and 70s saw VC firms focus on starting and expanding companies, adopting the Limited Partnership structure. Sand Hill Road in Palo Alto became famous as home to top VC firms like Sequoia Capital and Kleiner Perkins.
The National Venture Capital Association (NVCA) was founded in 1973, advocating for the industry in Washington. The 80s were a golden era for VC, but the 90s brought even more excitement with the rise of the internet and personal computers.
1990s - 2000s: Dear Internet
The internet revolutionized everything in the 90s, birthing iconic companies like Google, Amazon, Yahoo, and eBay. VC investments in tech soared from $1.5 billion in 1991 to over $90 billion by 2000. However, the dot-com bubble burst, causing massive losses, but also paving the way for the next wave of innovation.
The Era of Apps and Accelerators
Despite the losses, VCs remained bullish on tech. They began focusing investments by stage and industry, leading to the rise of companies like Airbnb, Uber, and Facebook. Accelerators like Y Combinator, Seedcamp, and Techstars emerged, providing startups with funding, mentorship, and connections.
This era also saw startup culture become mainstream, with shows like "Silicon Valley" and movies like "The Social Network" celebrating tech entrepreneurs.
Now: The Ever-Evolving VC World
Venture capital continues to evolve, especially with advancements in AI and the decreasing costs of starting a startup. Micro VC funds have emerged, investing smaller amounts in early-stage companies. Popular micro VCs include Baseline Ventures, Cowboy Ventures, and Initialized Capital.
The last decade introduced "unicorn" startups, valued at over $1 billion. The term was coined by Aileen Lee in 2013, and now, over 2,700 startups have achieved unicorn status. Some, like SpaceX and Stripe, have even reached decacorn status, valued at over $10 billion.
Despite ups and downs, VC remains a vital funding source for startups, constantly adapting with the tech sector. Investors will always chase high-risk ventures, and there will always be innovators seeking that initial boost to launch their ideas.
