The Rise and Fall of Venture Capital by Paul Gompers

TL;DR - Venture capital has spurred the growth and innovativeness of US small businesses.

Helpfulness - 5

Tags - venture capital, ARD, pension funds, SPIC, IPO, harvesting, grandstanding

Questions answered:

  • What spurred the explosion in VC in the 1980s?
  • Why are VC firms best suited to finance high-risk start-ups?
  • What role do venture capitalists play as investors?
  • How/when did modern VC develop in the US?
  • How did ARD shape VC?
  • Why equity financing is more conducive to VC than debt financing?
  • Where does VC funding come from?

Summary:

  • Small firms are more innovative than large firms.
  • Following ERISA (1979), funding for VC rose dramatically.
  • Venture capitalists monitor progress, sit on boards of directors, appoint/remove managers, and provide access to lawyers, consultants, and bankers.
  • Modern VC in the US was developed in the late 1800s/early 1900s by wealthy families.
  • The first modern VC firm (ARD) was developed in 1946 to finance WW2 era technologies for commercial application.
  • ARD founder Georges Doriot dubbed the “father of VC.”
  • SBICs rose (1960s boom) and fell (1970s bust) due to highly leveraged structures.
  • Goal = home run; modus operandi = hand-on management.
  • Increase in VC (1980s) correlated with IPO market, coincided with 1978 Revenue ACT and ERISA
  • Money flowing into new funds comes largely from tax-exempt sources
  • Timelines of VCs and pension funds (short-term) are mismatched.
  • Early-stage investing declined over 1980s.
  • 80% of VC investing comes from LP funds.
  • Inexperienced VCs (< 5 years) are under tremendous pressure; IPO too quickly
  • IPO is the most profitable method of harvesting.

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