A Brief History

 

Venture capital is as old as capitalism itself. But organized venture capital in the United States has a relatively brief history. After World War II, several wealthy families, including John Hay Whitney's and the Rockefeller brothers, decided to set up partnerships to finance new companies in electronics, communications, and other fields. Their timing was perfect. The combination of rapid technological advances in many fields during the war and pent-up consumer demand for new products created a booming economy in the '50s, largely fueled by the new technologies they backed.

Following the Whitney and Rockefeller leads, other wealthy families and individuals in New York, Boston, Chicago, and San Francisco also established venture partnerships during the '50s. In 1958, their efforts were given a substantial boost when Congress passed the Small Business Investment Act. This authorized the Small Business Administration to license and lend money at preferred rates to Small Business Investment Companies.

Within six years more than 700 licenses had been granted and half a billion dollars in private capital committed to SBICs. Many of venture capital's first generation of professional investment managers learned the ropes while working in these early SBICs.

Venture capital's first boom era peaked in 1969. During the succeeding eight years, new investment activity slowed and the professional community consolidated. During the same period, large institutional investors, particularly pension funds, became the dominant force in the stock and bond markets. By the late '70s, when lower capital-gains tax rates and a new wave of technologies combined to provide a fertile climate for renewed venture capital vigor, the financial institutions (pension funds, banks, and insurance companies) had begun to invest in venture partnerships as well. Major corporations also began to test the venture capital water, both by investing in established firms and by setting up their own venture capital subsidiaries.

Today there are approximately 660 venture capital pools: 250 private firms, 350 SBICs, and 60 corporate investors. Since most parent groups manage more than one venture capital pool, the number of investing entities is smaller. Organized venture capital is still concentrated in the cities and regions where it grew, although some branching out has begun.

In 35 years since its birth, venture capital has expanded from an informal art practiced by a tiny number of individuals into a formally managed business with carefully defined and controlled risks. It has also become a more active business. Most venture capitalists provide management advice and technical help as well as money to the companies in which they invest. It is still a very small community but, as the success of many of the high-technology companies and other small businesses it has spawned suggests, it is a vitally important part of the U.S. capital structure.