The History of Venture Capital
Venture capital investment is risky business with high growth potential. This way of funding is more accessible than ever, with innovative entrepreneurs getting a chance to prove themselves. Investors and startups alike, keep taking many risks motivated by insane success stories. These include the most well recognized companies of today, like Facebook, Google, Alibaba and many more. But before becoming the venture capital we know today, it went through a colorful history.
The first venture-resembling companies were founded in the 40s. Georges Dorot, named “the father of venture capitalism”, was the founder of the most prominent one – ARDC. The company was established to encourage investment in private businesses. It was the first to raise capital from regular people, rather than wealthy families like the Rockefellers or Vanderbilts.
11 years after it was established, ARDC hit the first venture capital “home run” after a $70,000 investment in an IPO was worth $355 million a decade later.
The Small Business Investment Act in the late 50’s continued to lay the foundation of venture capital. The act allowed the Small Business Administration (SBA) to license Small Business Investment Companies (SBIC’s) to invest in and manage new companies. The first venture-backed startup was “Fairchild Semiconductor”, which produced the first commercially practical integrated circuit. As most funds were appointed to technology-developing firms, venture capital became one of the biggest facilitators of Silicon Valley.
In the 80’s, the number of investment firms grew exponentially. From a few dozens in the 60’s, to over 685 at the end of the century. With the number of firms, their managed capital grew too – from $3 billion to $31 billion. However, the increased competition alongside the stock market crash of 1987 hampered the growth of the industry. Companies from Korea and Japan flooded the market with their investments into early-stage businesses, affecting the returns even more. Market growth slowed down, and many US companies began posting losses.
The dot com era followed in the late 90s - early 00’s. Apple and Microsoft grew the personal computer user base. Companies like AOL and Netcom made the Internet more widely available, Yahoo made it more usable. Venture returns became attractive again, the market experiencing a major boom around Internet-focused companies. Massive interest in the industry meant valuations began to inflate and reached 165% above the rest of the market. March 2000 was when Nasdaq began to crash - there were no new buyers bidding up company valuations and stock prices. Many tech-companies went under and the market fully bottomed out in 2003.
Uncertainty and fear slowly subsided, venture capital gaining interest once again. Funding became more widely accessible and diversified, with entrepreneurs’ ideas from different areas being realized. Companies funded projects based on research and potential, rather than relying completely on what’s trending.