History of Venture Capital

Do you know why venture capitalists earn carried interest? Understanding the history of venture capital and its evolution is key to comprehending why it is the way it is today. And to do that, requires looking back way before Silicon Valley was even born. 🌐 The Whaling Boom: High Risk Investing Before VC In the 18th and 19th centuries, whaling was a thriving industry. Whale oil was used for lighting and across various industries, making it an incredibly valuable resource of its time. 💡 The Birth of Early Venture Capital Outfitting a whaling ship required substantial capital, which often exceeded the means of individual shipowners. New Bedford was only one city in the broader whaling trade, yet dominated the market. Why? To finance these expeditions, a novel investment structure emerged there, laying the groundwork for what we now recognize as early venture capital. Merchants and wealthy individuals pooled their funds and resources to finance multiple whaling voyages simultaneously, spreading the risks across different ventures. 🛳️ Risk and Reward: The Whaling Industry's Legacy The whaling industry was a high-risk, high-reward endeavor. Each voyage was uncertain, as it relied heavily on the skill of the crew, favorable weather conditions, and, of course, locating whales. Many boats did not come back. As such, whaling investors embraced risk in the pursuit of substantial returns. This mentality of taking calculated risks and investing in unproven ventures echoes the essence of modern venture capital. 🚀 Venture Capital Today: Building on the Past Fast-forward to the present, venture capital shares the same spirit of backing early-stage ventures, often with the potential for exponential growth. Just like the whaling syndicates of the past, they understand that significant rewards may accompany calculated risks. 🌱 Reflecting on our Roots Venture capitalists don’t just share the same spirit, the funds themselves borrow certain aspects of the structures. For example, captains (our modern day entrepreneurs) received an outsized return in the profits, merchants (here the venture capitalist) built portfolios and sailors (our modern day employees) were often paid a percentage of the haul (i.e. stock options). And carried interest is called that way because it was literally what one could “carry off the boat” Last reflection and a cautionary tale: the whaling industry has had a devastating impact on whales, and the broader ecosystem. I've written about how startups should not "move fast and break things" - particularly in 'important' industries like healthcare and financial services. We need to be mindful or our impact. What do you think? PS: The photo is from a family vacation to Cape Cod where we visited the New Bedford whaling museum. #VentureCapital #BusinessHistory #WhalingIndustry #Entrepreneurship #InvestmentJourney

I was curious about when the term "venture capital" was first used by journalists, so I went down a rabbit hole on the New York Times website this weekend. The first article in the newspaper that ever included the term was published on March 17th, 1940. William J. Enright, an editor in the business department, detailed how corporate research laboratories were replacing independent inventors as the primary drivers of industrial innovation. He noted that this shift was shrinking opportunities for "venture capital," since developing and testing new products now required the immense financial resources that only large companies could provide. The second mention came in an unbylined piece published in October 1940. It covered a speech by Nelson Rockefeller urging a room full of auto industry executives to direct a "new flow of venture capital" from the United States into Latin America. He told the execs there was money and power to be gained from high-risk, cross-border investment aimed at building infrastructure like the Pan-American Highway. The third mention came in November 1940. Journalist Howard Calkins reported that America's accelerating defense buildup was driving renewed demand for "venture capital” to fund the expansion, rehabilitation, and modernization of facilities and equipment that had been starved of capital for years. Calkins argued that Depression-era securities regulations had made it too difficult for companies to raise money by selling new shares, and that loosening these rules would be essential to channeling private capital back into industry at the scale the emergency required. Then the term disappeared from the paper for nearly four years, not surfacing again until 1944, after which it appeared with increasing frequency. What strikes me about these early uses is how different they are from each other and yet how consistent the underlying impulse is. In each case, "venture capital" described private money willing to flow toward risk in service of some larger national need: industrial innovation, hemispheric alliance-building, defense mobilization. The term didn't yet refer to a specific asset class or industry. It was a description of a disposition. Capital that ventures. It's also striking how familiar the context feels. In 1940, the United States was staring down a world reshaped by rival great powers, scrambling to modernize its industrial base, and debating whether its regulatory framework was helping or hindering the flow of private capital into the sectors that mattered most. This was a country that needed innovation and investment to compete in a dangerous world, and a financial system that was trying to figure out how to channel risk capital toward that goal. Venture capital as we know it today came later. But the original demand for it came from the same place it comes from now: a nation facing hard problems that required someone willing to bet on solutions.

50 Years of Venture Capital, a Century of Bessemer This chart shows the distribution of venture capital firms — those that have backed at least five unicorns — by their founding year. One stands out significantly. Bessemer Venture Partners was founded in 1911. Henry Phipps Jr., co-founder of Carnegie Steel, started Bessemer Trust to manage his fortune, and they were backing risky technology ventures decades before the term "venture capital" existed. The modern VC industry began to take shape in the 1960s and 70s with the founding of firms like Greylock and Sequoia. The industry's growth accelerated following a key late 1970s regulatory change that allowed pension funds to invest in 'alternative' assets like venture capital, dramatically increasing the capital available. The industry also saw explosive growth in the late 1990s, with 80 unicorn-backing firms, including Insight Partners, founded in just a five-year span. This pace accelerated after 2000 with the establishment of major firms like Lightspeed and Andreessen Horowitz. The most significant wave occurred between 2010 and 2014, when 171 firms, including Sapphire Ventures, were founded. The momentum continued, with another 113 firms like FJ Labs launched between 2015 and 2019.    While the venture capital industry celebrates roughly 50 years since its modern inception, Bessemer has been at it for over a century — still competing alongside firms founded just yesterday. Thank you to the Stanford University Graduate School of Business Venture Capital Initiative for supporting this research. 

Most people believe that the origins of venture capital trace back to the semiconductor industry but this is a partial truth.. The full truth is that yes, semiconductors were the first major segment that VCs invested into in the 1960s. BUT, Steel had an equally important role to play in the formation of the modern VC industry. The world's oldest venture capital firm is Bessemer Venture Partners (BVP) which is a 113 year old institution managing $20bn in investment capital. 🧠 Its origins are fascinating: (a) BVP originates from Bessemer Securities which had $20M of investment capital (b) Bessemer Securities was created by Henry Phipps; one of the co-founders of Carnegie Steel - The fund was set up using the proceeds from the sale of his company in 1901 (c) Henry decided to name his family office "Bessemer" in reference to the Bessemer steel production process - This was the 1st mass market steel production process - It was the process used at Carnegie Steel (where Henry made his $$) Now, here's the twist: Carnegie Steel was sold to US Steel for ~$480M in 1901. And, US Steel was promoted by JP Morgan.. 🤯 So, one of the world largest & oldest "Technology" VC firms can trace its roots to old industry (Steel production) & old finance (JP Morgan). hashtag #venturecapital