Venture capital

New companies need money to grow.

Some people give money to these small groups. This is called venture capital. They help people with big ideas.

These groups often work with new tools. They might help with computers or medicine. This can be a big risk. Many new businesses might fail. But some become very big.

Some very large companies are called unicorns. They are worth a lot of money.

These helpers also give good advice. They help the new leaders make choices. This helps the business succeed.

New companies need money to grow. This money is called venture capital.

Firms or funds give this money to startups. Startups are new companies. These companies often have big ideas in technology. They might work with computers or medicine.

Venture capitalists take a big risk. Many new companies fail. But some become very successful. If a company is worth over $1 billion, people call it a unicorn.

As of May 2024, there were 1,248 unicorns.

In the past, only wealthy families gave money to new businesses. After World War II, new firms began to form. One famous firm was ARDC. It was started in 1946. Georges Doriot helped start it. He is often called the father of venture capital.

In the 1970s, the business grew fast. Many new firms opened on Sand Hill Road in California.

This area is near Silicon Valley. New laws also helped. These laws let pension funds invest in these companies. This gave the firms even more money to use.

Venture capital is a special way to fund new businesses. These businesses are often called startups. They are usually very young companies. Many startups work with new technology. They might focus on computers or medicine. These companies have high growth potential. This means they could become very large very quickly.

Venture capitalists provide money to these companies. In return, they get an ownership stake. This is also called equity. This means they own part of the company. This is a very risky job. Many startups fail and do not make it. But if a company succeeds, it can be huge. A company worth over $1 billion is called a unicorn. As of May 2024, there were 1,248 unicorn companies.

Funding a company happens in different stages. First, there are pre-seed and seed rounds. These are the very first steps for a startup. Entrepreneurs use seed money to test an idea. They might build a prototype or do research. This helps them see if the idea works. After that, they look for larger amounts of money. The first big round of professional funding is called Series A.

Venture capitalists want to make a profit. They do this through an "exit" event. One way is an initial public offering, or IPO. This is when a company sells shares to the public. Another way is a merger. This is when two companies join together. Some companies are simply sold to a competitor.

Long ago, venture capital looked very different. Before World War II, only wealthy families invested in companies. Families like the Rockefellers and the Vanderbilts were famous investors. In 1938, Laurance S. Rockefeller helped fund two big companies. One was Eastern Air Lines. Another was Douglas Aircraft. In 1938, Eric M. Warburg also started a firm. It later became Warburg Pincus. Modern firms only started appearing after 1945. Two important firms were founded in 1946. These were ARDC and J.H. Whitney & Company. ARDC was very special. It was the first firm to raise money from people other than wealthy families.

Georges Doriot is a very important name in this history. Many people call him the "father of venture capitalism." He helped start ARDC in 1946. He wanted to help businesses run by soldiers. ARDC had a huge success in 1957. They funded a company called Digital Equipment Corporation. By 1968, that company was worth over $355 million. This was a massive win for ARDC.

The industry grew even more in the 1950s. The Small Business Investment Act of 1958 helped a lot. It allowed the government to help small businesses. This helped the business grow very fast. Many new firms started to form during this time. The work became much more professional and organized.

In the 1970s, the industry found a new home. Many firms moved to Sand Hill Road in California. This area is near Silicon Valley. Kleiner Perkins was the first firm there in 1972. Sequoia Capital also started around that time. New laws also helped these firms grow. In 1978, rules were changed for pension funds. This allowed them to invest in these companies. This gave venture capitalists much more money to use. In the 1980s, the industry exploded. There were only a few dozen firms at the start. By the end of the decade, there were over 650 firms. The total money managed grew from $3 billion to $31 billion.

Venture capital is a specific type of private equity financing. It provides money to startup, early-stage, and emerging companies. These businesses are chosen because they show high growth potential. This potential is often seen in their increasing number of employees. It can also be seen in their annual revenue or scale of operations. Venture capitalists invest in these companies to gain equity. Equity is an ownership stake in the business. This process is very risky for the investors. Many startups face high uncertainty and fail. However, successful companies can become extremely valuable.

Funding usually happens in several distinct stages. The very first stages are called pre-seed and seed rounds. During a seed round, entrepreneurs seek money from angel investors or venture capital firms. They use this seed funding to validate a concept. They might also build a prototype or conduct market research. This initial capital is necessary to attract more investment later. After seed funding, companies move to institutional rounds. The first round of institutional venture capital is called Series A. This stage is designed to fund actual growth.

Venture capitalists aim to generate a return through an exit event. An exit event allows them to turn their ownership into cash. One common method is an initial public offering, or IPO. In an IPO, a company sells shares to the public for the first time. Another method is a merger, where two companies join together. A company might also be sold to a financial buyer in the secondary market. Sometimes, a company is sold to a competitor or a trading company. This process allows the original investors to realize the value of their stake.

The history of venture capital began with wealthy individuals. Before World War II, only rich families acted as investors. Notable names included the Rockefellers, the Vanderbilts, and the Whitneys. In 1938, Laurance S. Rockefeller helped finance Eastern Air Lines and Douglas Aircraft. That same year, Eric M. Warburg founded E.M. Warburg & Co. This firm eventually became Warburg Pincus. The Wallenberg family in Sweden also started Investor AB in 1916. They invested in early Swedish companies like Ericsson. Modern investment firms only began to emerge after 1945.

After 1945, the industry became more institutional. Georges Doriot is often called the "father of venture capitalism." He helped found the American Research and Development Corporation, or ARDC, in 1946. ARDC was unique because it raised capital from sources other than wealthy families. It was also a publicly traded company. ARDC had a massive success with Digital Equipment Corporation in 1957. By 1968, the company was valued at over $355 million. This provided a return of over 1200 times the original investment. This success helped establish the professional nature of the industry.

In the 1960s and 1970s, the industry moved toward technology. Firms focused on breakthroughs in electronics, medicine, and data processing. Arthur Rock is credited with introducing the term "venture capitalist" during this era. The industry also adopted a specific organizational structure. Firms organized as limited partnerships. The investment professionals served as general partners. The investors, known as limited partners, provided the capital. These limited partners typically paid an annual management fee. This fee was usually between 1.0% and 2.5% of the capital.

Silicon Valley became a major hub for this activity. In 1972, Kleiner Perkins became the first firm on Sand Hill Road. Sequoia Capital also emerged during this period in Menlo Park, California. The industry grew rapidly due to new laws and regulations. The Small Business Investment Act of 1958 provided helpful tax breaks. In 1978, the U.S. Labor Department relaxed ERISA restrictions. This allowed corporate pension funds to invest in venture capital. This provided a massive new source of capital for firms.

The 1980s saw an explosion in the number of firms. At the start of the decade, there were only a few dozen firms. By the end of the 1980s, there were over 650 firms. The total capital managed grew from $3 billion to $31 billion. However, the decade also brought challenges. The market for IPOs collapsed after the 1987 stock market crash. Competition increased as foreign companies provided more capital. Some large corporations even closed their own venture capital units. Despite these shifts, the industry remains vital to modern innovation.