Venture capital
Private equity financing for high-growth, early-stage companies.
Venture capital (VC) is a type of private equity where firms or funds invest in startup, early-stage, or emerging companies that show strong growth potential—whether in employees, revenue, or operations. In exchange for funding, venture capitalists receive an ownership stake (equity). They accept the high risk of backing unproven businesses, knowing many will fail, in hopes that a few will succeed. These startups often rely on innovative technology or business models, frequently in fields like information technology or biotech.
Funding typically begins with pre-seed and seed rounds. During a seed round, entrepreneurs seek money from angel investors, VC firms, or other sources to cover initial operations, validate their concept, build a prototype, or conduct market research. This early capital is critical for launching the venture and attracting later investment. After seed funding, the first institutional VC round is called Series A. VCs invest with an eye toward an eventual "exit"—for example, an initial public offering (IPO), a merger, a sale to a financial buyer in the private equity secondary market, or a sale to a competitor.
For new companies with limited history—too small for public markets or unable to secure bank loans—VC offers an alternative to angel investing, equity crowdfunding, and other seed options. Because of the high risk, VCs typically demand significant control over company decisions and a large ownership share. Privately held startups valued at over $1 billion are called unicorns; as of May 2024, there were 1,248 such companies. VCs also often advise executives on business models and marketing strategies.
**History**
Before World War II, venture capital was mostly the domain of wealthy families like the Rockefellers, Vanderbilts, Whitneys, and Warburgs. In 1938, Laurance S. Rockefeller helped finance Eastern Air Lines and Douglas Aircraft. Eric M. Warburg founded E.M. Warburg & Co. in 1938, later Warburg Pincus, which invested in both leveraged buyouts and VC. The Wallenberg family started Investor AB in Sweden in 1916, backing companies like ABB, Atlas Copco, and Ericsson.
Modern VC firms emerged after 1945, with the founding of American Research and Development Corporation (ARDC) and J.H. Whitney & Company in 1946. Georges Doriot, often called the father of venture capitalism, co-founded ARDC with Ralph Flanders and Karl Compton
- field
- Private equity financing
- known_for
- Funding high-growth startups in exchange for equity
- first_institutional_firm
- American Research and Development Corporation (ARDC), founded 1946
- first_west_coast_firm
- Draper and Johnson Investment Company, formed 1962
- industry_trade_group
- National Venture Capital Association (NVCA), founded 1973
- notable_early_investors
- J.P. Morgan, Wallenbergs, Vanderbilts, Whitneys, Rockefellers, Warburgs
Lore & Background
Before World War II (1939–1945) venture capital was primarily the domain of wealthy individuals and families. J.P. Morgan, the Wallenbergs, the Vanderbilts, the Whitneys, the Rockefellers, and the Warburgs were notable investors in private companies. In 1938, Laurance S. Rockefeller helped finance the creation of both Eastern Air Lines and Douglas Aircraft, and the Rockefeller family had vast holdings in a variety of companies. Eric M. Warburg founded E.M. Warburg & Co. in 1938, which would ultimately become Warburg Pincus, with investments in both leveraged buyouts and venture capital. The Wallenberg family started Investor AB in 1916 in Sweden and were early investors in several Swedish companies such as ABB, Atlas Copco, and Ericsson in the first half of the 20th century. Only after 1945 did modern venture capital investment firms begin to emerge, notably with the founding of American Research and Development Corporation (ARDC) and J.H. Whitney & Company in 1946. Georges Doriot, the 'father of venture capitalism', along with Ralph Flanders and Karl Compton (former president of MIT) founded ARDC in 1946 to encourage private-sector investment in businesses run by soldiers returning from World War II. ARDC became the first institutional private-equity investment firm to raise capital from sources other than wealthy families. Unlike most present-day venture capital firms, ARDC was a publicly traded company. ARDC's most successful investment was its 1957 funding of Digital Equipment Corporation (DEC), which would later be valued at more than $355 million after its initial public offering in 1968. This represented a return of over 1200 times its investment and an annualized rate of return of 101% to ARDC. Former employees of ARDC went on to establish several prominent venture capital firms including Greylock Partners, founded in 1965 by Charlie Waite and Bill Elfers; Morgan, Holland Ventures, the predecessor of Flagship Ventures, founded in 1982 by James Morgan; Fidelity Ventures, now Volition Capital, founded in 1969 by Henry Hoagland; and Charles River Ventures, founded in 1970 by Richard Burnes. ARDC continued investing until 1971, when Doriot retired. In 1972 Doriot merged ARDC with Textron after having invested in over 150 companies.
Reader's Guide
Venture capital has played a significant role in financing innovative technology and business model startups, particularly in high technology industries such as information technology and biotechnology. The industry's modern form began after World War II with the founding of ARDC in 1946, which established the model of institutional private-equity investment from sources beyond wealthy families. The passage of the Small Business Investment Act of 1958 allowed the U.S. Small Business Administration to license Small Business Investment Companies, providing tax breaks that helped contribute to the rise of private-equity firms. During the 1960s and 1970s, venture capital firms concentrated on launching and growing companies that capitalized on breakthroughs in electronic, medical, or data-processing technologies, making venture capital almost synonymous with financing of technology ventures. The common form of private-equity fund, still in use today, emerged in the 1960s, with limited partnerships where investment professionals served as general partner and passive investors put up the capital, paying an annual management fee of 1.0–2.5% and a carried interest typically representing up to 20% of the profits. The growth of the venture capital industry was fueled by the emergence of independent investment firms on Sand Hill Road, beginning with Kleiner Perkins and Sequoia Capital in 1972. In exchange for the high risk they assume, venture capitalists usually get significant control over company decisions and a significant portion of the companies' ownership. Privately owned companies that have reached a market valuation of over $1 billion are referred to as unicorns; as of May 2024, there were a reported total of 1248 unicorn companies.
Did You Know?
- ARDC's 1957 investment in Digital Equipment Corporation returned over 1200 times its investment, with an annualized rate of return of 101%.
- The term 'venture capitalist' is often credited to Arthur Rock, a pioneer of Silicon Valley during his involvement with Fairchild Semiconductor.
- The National Venture Capital Association was formed in 1973 to serve as the industry trade group for the venture capital industry.
- As of May 2024, there were a reported total of 1248 unicorn companies—privately owned companies valued at over $1 billion.
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