Then and Now: Venture Capital
"In the 50's and early 60's, they didn't call it venture capital," says Reid Dennis, the founder of Institutional Venture Partners, a firm with nearly $3 billion in committed capital. "They called it a special situation," he jokes.
Dennis, who made his first investment in October 1952 in Ampex, a company that produced an early version of a tape recorder, is one of several venture capitalists and entrepreneurs to be interviewed in Something Ventured, a new documentary film that explores the origins of the venture capital industry—told through first person accounts from the men that helped shape it, including Arthur Rock (who funded Fairchild Semiconductor, Intel, Apple and Teledyne), Tom Perkins (founder of Kleiner Perkins Caufield & Byers), Bill Draper (founder of Sutter Hill Ventures) and Reid Dennis.
In an interview with Inc.com, Dennis reflects on the shifts within the venture capital industry that has taken it from an unknown—and risky—investment scheme, to global enterprise. So how did it all start?
"If one of us heard about a deal down here in the peninsula, we'd invite the entrepreneur to come up and have lunch with us in San Francisco," says Dennis, who is considered one of the founding fathers of the venture capital industry. "We'd sit and eat while he'd tell us his story. So among the five of us, we could come up with maybe $100,000, and we'd go back to our offices and call up our friends who invested with us before, and we'd say 'Do you want to join us?' And sometimes they'd reply, 'Sure, I'll be in for 15 or 20.' And that’s the way we got started. It was an informal association of people that had full-time jobs doing something else."
Clearly, times have changed. According to the National Venture Capital Association, in 2010, there were nearly 800 venture capital firms, while venture-backed companies represented the equivalent of 21 percent of U.S. GDP. One of the major reasons behind the explosion of venture capital over the last half-century has to do with government deregulation. In 1978, for instance, the U.S. Labor Department relaxed ERISA restrictions, which allowed corporate pension funds to invest in the asset class.
But according to Dennis, the massive growth of venture capital came at price.
"One of the things that's changed," says Dennis, "is that a lot of young people are attracted to the business today because they think it's a great way to make money. We were attracted to the business because it was exciting and constructive and an interesting way to help people and work with people that you otherwise not work with."
Jimmy Treybig, the founder of Tandem computers, which received a $1.4 million investment in 1974 and grew to $3 billion by 1997, says venture capital has lost its focus.
"Nowadays, you have a lot of VCs who are going to fail, because they are just a finance [firm]," says Treybig, who now serves as an investment partner for the Austin-based venture firm, NEA. "They don't always focus on helping the companies, and they don't have the right people to help entrepreneurs with [their start-ups]. The firms come and go."
Certainly, the amount of VC firms that exist fluctuates with the market. For instance, though there are nearly about 800 VC firms today, there were about 1,000 firms at the height of the tech bubble in 2000. And a decade before the tech bubble, the venture market also faced near-collapse.
"The venture capital business is anything but serene these days," noted an article in The New York Times from October, 1989. "Profits for venture capitalists have dropped sharply and a shakeout is now gathering momentum. And fundamental changes in the business raise questions about whether venture capital, the pilot light of America's high-technology world, can continue to ignite innovation."
Now halfway through his 80's, Reid Dennis looks back on the early years of venture capital with an unmistakable fondness 'for the good old days,' that involved a hand-to-hand approach of mentorship and loyalty. And he's especially critical of the current system of venture capital that relies on one or two big 'wins' or 'exits,' for each fund.
"In the early days, we had somewhere around 60-65 percent of companies that were successful," he says. "Another 10-15 percent you might just get your money back. Today, there's so many people in the industry that say 'If we can get two big hits out of 10, we can make money.' I think that's the wrong approach. That's not an approach I'm comfortable with."