Little Known Facts about the VC Industry

I’ve been searching for a great history of the venture capital industry since before I joined Redpoint. There are a handful of books that are pretty good. Done Deals. eBoys. Creative Capital. But there’s a great one called VC by Tom Nicholas.

Nicholas traces the history of the venture capital industry back to whaling. They weren’t called venture capitalists back then, but they serve the same role. Men would broker relationships between wealthy individuals and adventuresome captains.

Capital met ambition, and crew set sail for years at a time in search of whale oil and balene, the flexible bone whales use to harvest krill from the ocean. Some would return with huge catches, fetching incredible sums of money back at shore, and netting the investors handsome profits. Others returned empty-handed after years at sea. Still others lost their lives in the pursuit of white whales.

Understanding the origins of the industry was interesting. But more fascinating still were the descriptions of the venture capital industry in the 1980s. Creative Capital did a great job explaining the history of American Research & Development, what many call the first venture-capital firm started by Georges Doriot.

But there was an era in the 80s through the mid-90s that is reminiscent of the dot com era that I knew nothing of. In 1983, there were 173 venture backed technology IPOs. Almost 1 each working day.

Then there are a lot of other details in this book. For example, in 1996, Kleiner Perkins invested $8 million for a 13% stake in Amazon, a surprisingly low ownership stake for the first institutional round in a company. Or talk of the pacing of venture funds in the dot com era. Typically most venture firms raise funds for ten year periods, but invest them over two or three. In the late 1990s, one firm invested $600 million in 12 months and another deployed their entire fund in 9.

And if you want to know which venture firm created the archetype of limited partners, associates, diligence processes, Monday partner meetings and deal memos, you’ll have to read the book. Here are a few hints: this firm was started with an initial investment from T. Rowe Price, and one of the founders was a lieutenant of Georges Doriot at ARD. In fact, it was Doriot who named this firm.