How did venture capital start?

Venture capital has a complex history rooted in risk-sharing and innovation funding.

Early Origins

• Whaling Industry (Late 1700s): The concept of pooling resources to mitigate risk can be traced back to the New England whaling industry. Wealthy investors would fund multiple whaling voyages, balancing successes with inevitable failures 1.

Mid-20th Century Developments

• American Research and Development Corporation (1946): George Doriot at Harvard created AR&D, the first modern venture capital firm, using a similar risk-sharing model to fund early-stage companies. Its success with the Digital Equipment Corporation highlighted the potential high returns from this investment approach 1.
• Arthur Rock on the West Coast (1950s): Arthur Rock pioneered West Coast venture capital by understanding that significant risk-taking could lead to massive successes. His backing of Fairchild Semiconductor signified a crucial shift towards investing in high-potential tech startups 2.

Regulatory and Economic Changes

• ERISA Amendment (1979): The venture capital industry lobbied for changes to the Employment Retirement Security Act (ERISA), allowing pension funds to invest in higher-risk ventures. This pivotal change enabled a significant influx of capital into the industry 3.
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    Venture Capital Origins

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    Venture Capital Origins

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    Venture Capital Evolution

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    Evolution of Venture Capital

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• 1980s Economic Boom: Lower taxes on investment gains and decreased inflation after the Volcker shock boosted financial markets, driving more investment into venture capital 3.

Evolution of the Industry

• Phases of Modern VC: Barry Eggers describes three phases of venture capital:
  • Craftsman Era (1980-1995): Focused on deep involvement and hands-on company building.
  • Scale-Up Phase (1995-2010): Marked by larger funds and more significant capital influx.
  • Specialization Phase (Post-2010): Characterized by the emergence of various specialized funds and investment stages 4.

The evolution of venture capital has been marked by strategic risk-taking, regulatory shifts, and phases of industry specialization.