Over the past five decades, the venture capital industry has become a notable force in fueling the start-up, growth, and impact of many innovative tech companies that have changed the world. Though the majority of startups do not receive funding from venture capitalists, in Silicon Valley they have invested in and helped launch and grow companies like Intel, Apple, Google and Uber, profoundly changing how billions of people live, work, and play.
Venture capitalists help determine what new tech products and services become a part of our lives. Understanding how the venture capital industry works, how it has developed, and where it’s headed provides context in which to evaluate the benefits and downsides of tech innovations and the companies that create them.
Venture capitalists, or “VCs”, fund startup companies. They raise money from limited partners—often investors representing pension funds, insurance companies, endowments, foundations, and wealthy people—to provide money to entrepreneurs. In exchange, VCs get part ownership through stock and also a seat on the board. They advise the CEO and foster connections to help the new business find customers, suppliers, executives, and employees.
New tech companies are risky bets. Venture capitalists expect most of those they’ve invested in to fail or break even but hope at least a few will pay off, either through sale to another company or by going public in the stock market with an IPO (initial public offering).
Many argue that the US’s global domination in tech could not have happened without these pioneering investors and point out how companies funded by venture capital employ hundreds of thousands of people, some lifted out of poverty. Others believe their impact has been overstated, that “picking winners” perpetuates inequality and prevents healthy competition, or that VCs focus more on enriching themselves and their partners than on building lasting companies and creating jobs.
What do you think? Explore stories of venture capitalists in their own words.
In those days if you said you were a venture capitalist people didn’t understand—including your wife—what you did for a living.
— Peter Crisp, Venrock
Early investors in new businesses tended to be from wealthy families dabbling in things that interested them. After World War II, a growing pool of people who wanted to make new technologies broadly available through new companies began to experiment with partnership and funding models, learned how to find promising entrepreneurs, and banded together to lobby for favorable investment policies. Meet some people from the formative days of venture investing in the timeline below.
In 1938, Laurance Rockefeller, a member of the wealthy oil dynasty, invested in WWI flying ace Eddie Rickenbacker’s new Eastern Airlines.
“When World War II came along Laurance went in the Navy. After the war he got out of the Navy, he said to himself, there were a lot of very interesting technological developments that came as a result of World War II from electronics to landing systems to whatever. He said there must be some interesting companies around that have some useful technologies if we could find them and invest in. So, he put that team of three guys together to go out and look for these investments.”
—Peter Crisp, Venrock, Oral History
Photo: Eddie Rickenbacker (seated second from right) and the Eastern Airlines Board of Directors; Laurence Rockefeller is standing third from right (photo courtesy of Auburn University Special Collections and Archives).
After World War II, Boston leaders believed the city should have a way to support their many scientist-entrepreneurs. In 1946, they formed the American Research and Development Corporation as a publicly-held investment company and recruited Harvard business professor Georges Doriot to be president. Doriot saw investments as philanthropic endeavors, although that didn’t stop him from driving a hard bargain to get over 70 percent ownership in Digital Equipment Corporation for only a $100,000 investment in 1957. The company went on to become an early computer powerhouse. Read the proposal.
“But the unusual thing about Doriot was that he didn’t teach accounting; he didn’t teach any particular business school practice. Instead he taught how a young businessman should behave, what your bosses expect of you . . .”
—Tom Perkins, Kleiner Perkins, Oral History
See what Doriot’s lectures may have been like on topics like success and risk.
Arthur Rock and Fairchild Semiconductor
When eight brilliant young scientists and engineers working for the mercurial Nobel-prize winner William Shockley wanted to quit en masse, Arthur Rock convinced them to form their own company and secured funding for it from Fairchild Camera and Instrument. After that success, he moved to Silicon Valley and formed a venture capital partnership with Tommy Davis in 1961.
“When I started coming out with Fairchild Semiconductor, I realized that there were a lot of small companies around this area that were looking for capital, and the capital was all in the East. And I thought that maybe I could bring some of the Eastern capital out to the Wild West.”
—Arthur Rock, at CHM, May 1, 2007
To spur entrepreneurship, Congress passed the Small Business Investment Act in 1958, and in 1962 Bill Draper and Franklin “Pitch” Johnson scraped together money to set up Draper & Johnson, a private small business investment company that took advantage of tax breaks and government loans.
“We had $25,000 because that’s about all I had in my life, and we each put in $75,000, and that was enough to get a $300,000 commitment from the SBA, and we were license number 12,” says Bill in his oral history.
Can We Offer You Some Money?
Hear Bill describe looking for investment opportunities in what became Silicon Valley in CHM’s “Trailblazers of Venture Capital.”
In the 1950s, while keeping their day jobs, Reid Dennis and a few other private investors, called “The Group,” met for lunch in San Francisco to hear pitches from tech entrepreneurs. They ate while the entrepreneur described his business (it was always a “he” at that time), and then they sent him to wait out on the sidewalk while they made the decision whether or not to invest. By 1969, the group had evolved into the Western Association of Venture Capitalists, the first official nonprofit venture capital organization in the world.
“It is hard to realize today how small this industry was and how small the high tech industry was right after World War II. . . . When I got out of school in the early ’50s, there were no publicly traded high tech companies on the peninsula. None.”
—Reid Dennis, Institutional Investment Partners, at CHM, April 27, 2005
Legendary firms Kleiner Perkins and Sequoia Capital were both founded in 1972, when there were only a handful of venture capitalists. Different personalities were reflected in differing philosophies and management styles, but firms often shared information and collaborated on deals. Tom Perkins describes having fun with Sequoia founder Don Valentine.
“We were both on the board of Wilf Corrigan’s LSI Logic. Wilf is a very powerful personality and Don is, and maybe I am, and we get along very well. There’s a famous joke in the company that Wilf made a pronouncement: he was going to make—I can’t remember the number, but such and such, so many cents a share—two or three quarters down the road, and Don and I didn’t think he was going to do it. I said, ‘Wilf, if you do that we’ll build a statue of you and put it in the parking lot,’ and Don says, ‘And we’ll make it out of gold.’ Well, he [Wilf] did it so I went in to Chinatown and I found the gaudiest, most repulsive Buddha I could find, but it was big. . . . and in a crazy way it looked a bit like Wilf. It was bald and everything. And then we got gold leaf somewhere and we presented this to him and it was pretty hysterical.”
—Tom Perkins, Kleiner Perkins, Oral History.
Photo: Walker’s Wagon Wheel, a Silicon Valley landmark where tech workers, engineers, and venture capitalists mingled and shared information.
Founded in 1973, the National Venture Capital Association (NVCA) supported legislation that favored opening the doors to venture investments. A 1979 change in ERISA dismantled “the prudent man rule,” which had formerly prohibited institutions like pension funds from making risky investments. The NVCA also lobbied to lower taxes on capital gains from the sale of stock in 1978 and again in 1981, making venture investments more attractive. From then on, the industry was off and running, learning and adjusting through booms and busts.
“The industry really didn’t take off except for adventuresome few institutions until 1977 when they passed the law . . . that enabled institutions to invest in a venture fund and let the entire portfolio be counted as one investment. Prior to that, the theory was that the institution was responsible for the performance of every single thing in a portfolio so they really were scared to death to make investments in a fund which had 20 investments and they didn’t know anything about the 20 companies.”
—Alan Patricof, Greycroft, Oral History
This poster, developed by Silicon Valley PR firm 1185 Design, provides a stunning visual representation of a thriving venture capital industry on the West Coast. Its astonishing growth and reach over just 25 years owed much to the interconnected networks of the people in the industry and their “cooperative competition.” And, in a testament to the relationships developed over time, successful entrepreneurs began to transition to venture themselves, funding and guiding the next generation of startups. As the ’80s progressed, success attracted more and more people to the industry.
“The industry was pretty concentrated, and it put the entrepreneurs at a disadvantage because it was hard to hold the line on pricing when most of the venture firms knew each other well and talked with each other. That changed. The amount of money that came in during the 1980s changed that dynamic. It spawned a lot of firms, some with little experience and a lot more money than common sense. It changed the price discipline and the leverage that you had over the entrepreneur.”
—Michael Brooks, Venrock
Access to the internet was controlled by the government until 1993, when Bill Clinton’s administration opened it to the public. In a modern Gold Rush, users flocked to the web. The opportunities seemed boundless and no one wanted to be left behind. Venture investors backed dot.coms with massive amounts of money despite shaky business models. People began to believe that the old laws of business didn’t apply to this new medium. They were wrong. The bust came in 2000 when $5 trillion in tech company market value disappeared.
“One of the things that happened then is everybody became an early stage investor on a internet company. There were thousands of everything. So this ability to make any mistake at the start, the ability to have a greenfield opportunity to cruise around in. Everybody got a little patch, and it was very Darwinian, and one mistake I think venture capitalists made at the time, and we probably made it with some of our companies, is, ‘Let’s give them more money to get out of their small patch.’ But the turf was chopped up on a dozen ways, and we also had, as time went on, macro issues that hit everybody too. A downturn in the economy.”
—Ann Winblad, Hummer Winblad Venture Partners
How do venture capitalists see their roles as funders, board members, and advisors?
“The role of the general partner in this play was to be the absolute best director that the entrepreneur had, and that if you could win the Oscar, if you will, for the best supporting actor, that that would be a very fine goal.”
—Henry McCance, Greylock
“So, I’m not a technologist, but I am a pretty good judge of people and in business it’s all about people. If the people are right, the business has a chance. If they’re wrong, it won’t work. So, the most critical part of that process is evaluating people.”
—Frank Bonsal, NEA
“Leah’s [Busque, founder of TaskRabbit] a truth seeker, right? And I’m a truth seeker. And so, we have mutual respect for the truth. And what that means is, as long as she’s seeking truth and I’m seeking truth, we can have an honest discussion about things.”
—Ann Miura-Ko, Floodgate
“Being a venture capitalist is a staff position. You’re trying to get people to do things but you don’t have a lot of direct authority. You can fire them ultimately but that’s a very tough thing to do. You can’t do it too often. So you really have to earn people’s respect and get them to want to do things that they should do.”
—Bill Davidow, Mohr Davidow Ventures
What do venture capitalists’ relationships with entrepreneurs look like?
The word cloud below was created from a collection of phrases that thirty venture capitalists used to describe how they see their relationship with entrepreneurs in their oral histories at CHM. It gives greater prominence to words that appeared more frequently. Unsurprisingly, almost every venture capitalist used the words “entrepreneur,” “company” and “people.” But the words that only one or a few of them used reveal several different, sometimes opposite approaches to the founder-funder dynamic. For example, words like “consensus” and “debate,” or “reasoned” and “feel,” indicate different approaches to advising.
Many factors come into play when a funder considers whether or not to found a new startup. Decisions are based on facts like the experience of the founders and whether a new product actually works, as well as more subjective factors like first impressions, unconscious bias, and “gut feel.” Relationships and networks also play a key role. The funding stories of early startup Intel in 1968 and Apple almost a decade later presents a study in contrasts, although both have a happy ending.
Robert Noyce was an MIT graduate, a brilliant physicist, and a natural leader. He was originally recruited by William Shockley to join Shockley labs in 1956, an early semiconductor company. Less than two years later, along with 7 colleagues, Noyce left Shockley to form Fairchild Semiconductor. After serving in several senior management positions at Fairchild, Noyce and cofounder Gordon Moore, the chemist of “Moore’s Law” fame, left to form their own company in 1968. They called it “Intel” for “integrated electronics,” but they weren’t quite sure what they wanted to make. They needed a funder who would have enough faith in them to take a chance and give them time to figure it out.
Steve “Woz” Wozniak and Steve Jobs met in 1971, and together made and sold “Blue Boxes,” illicit devices for making free long-distance calls. They formed Apple Computer in 1976, and demonstrated the Apple I Woz had built in the Jobs family garage to the hobbyists at the Homebrew Computer Club. It was a hit and the duo was inspired to form a company to sell the new personal computer to their hobbyist friends. Jobs sold his VW bus and Woz his HP calculator to fund the new business, but it wasn’t enough so they went looking for funding. Venture capitalist Don Valentine was turned off by their youth and lack of experience, long hair, beards, and “hippie” clothes. He was unwilling to take a chance on the two “renegades from the human race.” He wasn’t the only one. Apple desperately needed money to get off the ground.
Venture capitalist Arthur Rock had helped Robert Noyce and Gordon Moore and their cofounders establish Fairchild Semiconductor, and he’d stayed in touch over the years, impressed with their business acumen and technical brilliance. When Noyce called to ask if he would fund the new company, Rock immediately said, “I’m in.” Gordon Moore says, “That has to have been the easiest financing of a startup to have occurred in Silicon Valley.” To raise the $2.5 million needed, Rock typed up a vague three-paragraph business plan himself to give other investors at least something to look at.
Knowing that his friend, Mike Markkula, who had retired early from Intel, spent his spare time mentoring young entrepreneurs, Don Valentine introduced him to the two Steves. Markkula’s technical knowledge and dabbling with early computers helped him see how brilliant Woz’s product was and he agreed to come on board with an investment as a third cofounder and committed to guide the company. He wrote the business plan himself and describes why he took it on in this video. Markkula’s reputation helped venture capitalists overcome their skepticism about the other two cofounders. Indeed, their youth and inexperience was cited as a “risk factor” in the business plan.
Intel is the world’s most valuable semiconductor chip maker, with revenues of nearly $70 billion in 2019 and a market capitalization over $300 billion. Its microprocessors are found in most personal computers.
Apple is the world’s most valuable publicly traded corporation at over a trillion dollars. Taking the world by storm in 2007, the company’s ubiquitous iPhone accounts for over half of its revenue.
The venture capital industry is overwhelmingly male and white, and white male VCs tend to invest in entrepreneurs who look like themselves, something called “pattern matching.” But there have been women involved in venture capital from the beginning and there is a growing understanding, based on years of solid research, that companies with more diverse leadership in terms of gender, race, ethnicity, etc. outperform companies with less diversity.
Although 52 women became VC partners or general partners for the first time in 2019, a 37 percent increase since 2018, there is still much more to be done. Below, both women and men venture capitalists from Silicon Valley share their experiences, perspectives, and strategies.
“After my job at TA I had actually founded three companies and all three went public, including McAfee Associates. And you’d think that that would be a kind of no-brainer to hire me for the next associate job. And I could not get a job after Harvard Business School to save my life. I mean, it was so hard. And I even got a job offer with a private equity group, and I said, ‘I don’t want that, I want to be a venture capitalist.’”
“And so I think there need to be structural changes where, you know, limited partners need to stop investing in all-male venture capital funds, right? You know, they need to measure salaries and performance and percentages like some of the larger companies are doing. But actually get the data and see if there are biases.”
Venture capitalist Sonja Hoel Perkins is the founder and managing director of the Perkins Fund and a cofounder of Broadway Angels. She was the youngest-ever general partner at Menlo Ventures before starting her own fund. Hear more from Sonja.
“I was the least likely person to be a venture capitalist. First of all, I’m a woman. Second of all, I went to the College of St. Catherine’s and the University of St. Thomas for my graduate degree. Most people think I went to get my graduate degree in the Caribbean somewhere. So I just do not fit any mold of any set theory you pick for venture capital.”
“I’ve always pushed back a little on the pedigree thing, so I do think the fact that most venture capitalists went to Harvard, Stanford, or MIT is more of an issue in similarity and bias, rather than diversity of gender, race, although that has to change, too. There are a lot of diversity issues.”
Pioneering software entrepreneur Ann Winblad cofounded Hummer Winblad Venture Partners. See a story from Ann’s oral history.
“It’s clear that we would have made better decisions in the last decade at Sequoia in a handful of cases that are incredibly valuable today in terms of the company, if we would have had more women and more diversity in the room when we made those decisions. . . . I mean candidly we passed on both Snapchat and Pinterest. And it’s my belief that if we had more women in the room, we would have had a different outcome on both of those decisions. Probably cost the partnership several million dollars.”
Jim Goetz is a venture partner at legendary Sequoia Capital. Watch a video about WhatsApp’s immigrant cofounder Jan Koum and his relationship with Jim.
“If you look at the number of founders that are backed by venture, depending upon the source again, it’s less than two or three percent are female founders. So we really have a problem here, and I felt a responsibility to transition into venture even though it was never a career that I had planned for.”
‘If I get invited to a conference or to speak on a panel and I don’t see another woman or a representation from a diverse community that’s not represented, depending upon the setting, than I actually tell the organizer ‘I don’t want to come unless you let me invite someone. If you can’t find them, I’ll find them for you.’ So I think we can all be our own kind of advocates and agents.”
Formerly a corporate executive, Joanna Drake is a general partner at seed-stage venture fund Core Ventures Group and an active member of female executive groups. Hear more from Joanna.
“Now we can appeal to the capitalist sensibilities, the greed of the venture capital firms, and create some sense that if you don’t actually start to create diversity, not only is it just bad for business, because you shouldn’t be sitting around at partnerships saying, ‘Yeah, that business where it’s, you know, the consumer is 50 percent of the population, a bunch of women, I’m gonna go ask my wife what she thinks about this business, even though my wife is not part of the partnership.’ You need to have that firsthand experience, you need to have more perspectives around the table. And that works for people of color as well. And I think just having lots of different diverse viewpoints is becoming increasingly important.”
Ann Miura-Ko is the cofounder of Floodgate capital. Hear more from Ann.
“I think that Silicon Valley gets a little full of itself every once in a while, and believes its own PR, and tends to make people self-important; and I think that’s a danger. And it also has led to some bad practices, and we see it revealed every day really. And this whole sexism thing that’s come about, I mean it’s not a surprise. I mean it’s simple as ABC—C is going to follow A and B, and it’s just the end result of exploiting an advantage. And so I think it’s really important that these kinds of activities are revealed.”
Dick Kramlich is a cofounder of bi-coastal venture capital firm New Enterprise Associates. Hear more from Dick.
“One thing that I’ve seen is at least in boards, it’s changing. And for me, being on a board allows you to have a lot more impact and deal with a lot of the existing power hierarchy and start having those conversations from a place where you’re across the entire organization.”
Laurie Yoler was a founding investor in Tesla and serves on a number of boards. Hear more from Laurie.
“Diversity creates stronger systems, right? So I’m a big believer in it. That said, Silicon Valley has been a machine that kicks out certain kinds of companies and certain kinds of entrepreneurs. And they tend to come from, as I call it, central casting, right? ‘I got my undergrad EE from MIT, and then I worked at Google as an engineer, and then I got my MBA from—pick one—Stanford, Harvard, Wharton, you know, those five or so that you go get your MBA. And then you come back and then you . . . become a product manager at—pick your tech company—and then you start your company. And you know, we need to break that mold.”
Threshold Ventures’ Heidi Roizen is a Silicon Valley executive, venture capitalist, and entrepreneur known for speaking out against the harassment of women in technology. Hear more from Heidi.
“Say, ‘If I am not disproportionately helping, I am part of the problem.’ That’s true within organizations, it’s true within venture and investing. Hold yourself accountable. What’s the way, every week, that I’ve done something to help you? Because that’s the way it’s going to change is enough people getting in the field, and that’s how cultures change. As an organization, say, ‘We are going to make sure that we are recruiting well.’ You can do the Rooney Rule, which is like every open position, unless I’ve interviewed diverse candidates for that position, I cannot make an offer to hire, right? There are all kinds of things that are really important and everybody has to work on it.”
LinkedIn cofounder Reid Hoffman is a venture capitalist at Greylock Partners. Hear more from Reid.
What does venture capital look like outside Silicon Valley?
With nearly 50 percent of global investment, Silicon Valley is the undisputed capital for raising capital. But the industry has also matured on the East Coast where it originally began, with some older firms developing a bi-coastal presence. It is growing in areas like the Midwest as the role of entrepreneurial endeavors in building healthy local economies is being recognized. And around the world it’s evolving very differently in different places and flowing across borders. According to a report from the Rhodium Group, between 2009 and 2019, China invested $148 billion in the US and the US invested $276 billion in China.
Below, meet some VCs from beyond Silicon Valley.
In recent decades venture capital has generated more economic and employment growth in the US than any other investment sector, according to the Brookings Institute, delivering more than 21 percent of the country’s GDP through venture-backed business revenues though making up only .2 percent of GDP. But venture capital has also been in the news for its abysmal record on equity and access in the industry and for stifling competition by propping up companies that aren’t earning revenues, sometimes leading to layoffs and company collapse. Is the model broken? Does it no longer serve society?
Many individuals and organizations are working to make things better: to include more diverse funders and founders like the women investors at All Raise; to evaluate performance not just through financials but also by considering social and environmental impact as companies committed to a triple bottom line are doing; and, to consider ethical questions about sustainable growth and positive impact before funding a new business as some venture capital firms now undertake to do.
If these trends gain momentum, and if we improve on the US venture capital model, perhaps the industry’s experience and know-how can effect real change through new tech innovations that serve humanity and the planet on a massive scale.
That could be a bet worth taking.
Explore the resources below to learn more about the venture capital industry.
Steve Blank, “The Secret History of Silicon Valley,” CHM lecture, Nov. 20, 2008.
Brad Feld, “A Venture Capital History Perspective From Jack Tankersley,” FeldThoughts, August 2015.
Paul A. Gompers, “The Rise and Fall of Venture Capital,” Business and Economic History, 1994.
David H. Hsu & Martin Kenney, “Organizing Venture Capital: The Rise and Demise of American Research & Development Corporation, 1946–1973,” Industrial and Corporate Change, 14 (4), 579-616 (2004).
Jake Powers, “The History of Private Equity & Venture Capital,” Corporate LiveWire, February 2012.
Udayan Gupta, Done Deals: Venture Capitalists Tell Their Stories, Harvard Business Review Press, September 2000. See chapter on Lionel Pincus, “The Warburg Pincus Story.”
Dawn Levy, “Biography revisits Fred Terman’s roles in engineering, Stanford, Silicon Valley,” Stanford Report, November 2004.
Paul A. Gompers, Will Gornall, Steven N. Kaplan, and Ilya A. How Do Venture Capitalists Make Decisions?” Journal of Financial Economics, Volume 135, Issue 1, January 2020, Pages 169-190.“
William H. Janeway, “The Political and Financial Economics of Innovation,” Institute for New Economic Thinking, April 2012.
Riva-Melissa Tez, “Finance: An Industry Based on Psychology,” Medium, November 2014.
“The key to industrial capitalism: limited liability,” The Economist, December 1999.
Martin Kenney & John Zysman, “Unicorns, Cheshire cats, and the new dilemmas of entrepreneurial finance,” Venture Capital, 21:1, 35-50 (2019).
Pam Kostka, “More Women Became VC Partners Than Ever Before In 2019 But 65% of Venture Firms Still Have Zero Female Partners,” Medium, Feb. 7, 2020.
Pitchbook, The VC Female Founders Dashboard.