VC: An American History by Tom Nicholas

Chapter 3: The Rise of Private Capital Entities.

Source - book, Harvard press

TL;DR - Ultra wealthy individuals, including Mellon, Rockefeller, Carnegie, and the railroad “big four” needed investment vehicles meant for long term asset management. They often invested a portion of their wealth into early-stage ventures, developing into modern VC.

Helpfulness - 5

Topic Tags - Family offices, Angel, VC history, early players, incentives?

Questions answered:

  • How did the modern VC industry develop?
  • Who aided in the development of the VC industry?
  • What incentives did they have?

Summary:

  • In the early 20th century a multilayer system of financing emerged. Founders were excepted to bootstrap or raise money from FFF until being able to attract enough attention to acquire venture capital. This was the “Pecking order.”
  • Venture capital normally came from wealthy individuals, as individuals back then had enough wealth to fund startups alone. Other times, there would be lead angel investors that would share the startup with other angel investors.
  • Modern venture capital firms can be traced back to wealthy families.
    • Venrock was founded by Rockefeller
    • Bessemer Venture partner was founded by Henry Phipps.
    • Rockefeller, Carnegie, J.P. Morgan, etc.
  • Corporations and partnerships also invested in early-stage risky ventures.
    • J.H. Whitney and company was founded by a group of wealthy families
    • Similar to today’s CVC or private equity groups
  • These early forms of venture funders had similar due diligence and sourcing methods compared to modern-day VC (1940, 1950s).
  • Therefore, wealthy individuals were early players of high-risk venture investing. People like Leland Stanford, Mark Hopkins, Collis Huntington, and Charles Crocker were known as the “Big four” as they made large sums of money from the railroad initiative. They were ultra-wealthy, and funded many early ventures.
  • Today’s Ford started due to a wealthy individual’s investment. “Ford’s first enterprise, the Detroit Automobile Com­pany, was financed by the efforts of William Murphy”
  • In Cali, Venture funded tech companies were often tied to Stanford.
    • Telephone and telegraph company was founded by a Stanford graduate, funded by three wealthy Stanford Alumni.
    • “[The California] geographic area developed through interactions among wealthy angel investors, educators, and entrepreneurs”
  • In the early 20th century, demand for investment vehicles meant for long term asset management led to the development of many family offices and banks, which played an important role in early VC financing.
  • By the 1960s, Bessemer securities, linked to Henry Phipps, had already invested over $6 mil in venturing.
  • Laurance Rockefeller was key to the development of modern venture capitalism, stating “what we want to do is the opposite of the old system of holding back capital until ­ a field or an idea is proved completely safe. We are undertaking pioneering proj­ects that with proper backing ­ will encourage sound scientific and economic pro­gress in new fields— ­ fields that hold the promise of tremendous future ­ development.” This was the idea that gave bloom to VC. Time Magazine wrote about how Laurance eased the financing constraints for startups and later-­stage companies, extending the frontier of technological development.
    • Laurance Rockefeller invested in many ventures in the aviation field.

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