The History and Future of Venture Capital (and what might be possible with truly large amounts of venture capital)

Venture capitalists offer knowledge, connections and - of course - capital. 

The initial American model for venture capital was whaling. The average voyage was about 4 years and that venture was expensive. The returns to whaling ventures look very similar to modern day venture capital returns. This graph from Tom Nicholas' VC: An American History compares returns to modern venture capital to returns to 19-century whaling ventures. For instance, about 2.5% of whaling ventures and about 1.2% of modern VC funded startups yielded returns worse than negative 25%. 1.0% of whaling ventures and 1.2% of VC backed ventures yield returns between 81% and 100%. 19th century whaling and 21st century startups have fairly similar risk - return profiles.

The classic American novel Moby Dick was published in 1851. By the end of that decade, oil had been discovered in Pennsylvania and this new kind of oil eventually replaced whale oil as lubricant, source of illumination and (once the car had been invented and they finally had a use for the gasoline that had long been a waste product in oil refining) energy.

As the oil industry shifted from whale oil to crude oil, the families who had made fortunes in whaling, had already been investing their money in textiles. New Bedford had been a whaling town; the returns from whaling were then used to fund a new kind of high-risk, high-return venture: New Bedford became a manufacturing town.

Northern California - home to the gold rush a decade before oil was discovered in Pennsylvania - also had experience in high-risk, high-return ventures. Most gold mines failed but some made you rich. And the net effect of mining was transformative: in 1846, San Francisco's population was only 200; by 1852 it was 36,000 and tens of billions in gold had been mined in California. San Francisco was founded on a boom economy and the notion of high-risk, high-return was in its DNA.

Leland Stanford made his fortune building a railroad to California. When he founded Stanford University in the Bay Area, he stipulated that the land around campus could never be sold. And it was a lot of land. Stanford has more acreage than all but one other university in the world. Eventually, university administrators realized they could sublet land on campus. Fred Terman - the visionary professor and then dean who introduced his students Hewlett and Packard to each other with the suggestion that they start a business together - realized that Sand Hill Road could be sublet to venture capitalists who might fund startups led by Stanford graduates. At that time there were very few venture capitalists anywhere in the world, much less on university campus. Sand Hill Road is now to venture capital what Wall Street is to stocks.

In 1979, a new law was passed that essentially said it was prudent for investors to put some portion of their portfolio money into venture capital. Suddenly, capital from pension funds flooded into the venture capital industry which greatly expanded and the Bay Area along with it. This venture capital has changed American business.

In his 2019 book Secrets of Sand Hill Road, Scott Kupor claims that since 1974, "42% of public companies are venture backed, representing 63% of market capitalization. These companies account for 35 percent of total employment and 85 percent of total research and development spending."
Which, he points out, is "pretty good for an industry that invests about 0.4 percent of the US GDP.

Apple is the most dramatic example of how much value venture capital can create. Between 1978 and 1980, Apple raised about $3.5 million in capital. In 2018, Apple's market capitalization hit $1 trillion; last year it hit $2 trillion. (Things had become more expensive than when Hewlett and Packard started their business in a Palo Alto garage with $595.)

Now we're at a curious point. In the 1970s, aspiring entrepreneurs competed for startup capital from venture capitalists. Today, venture capitalists compete to invest in entrepreneurs. 

Capital used to be scarce. Now it is entrepreneurship. The limit has shifted. In 2020, 287 funds raised $69 billion, up from $56 billion in 2019.

$69 billion is a paltry sum. Household net worth is about $125 trillion.

We have funding enough to risk on any number of startups that could create an abundance of wealth and jobs. Capital is not the limit: entrepreneurship is. And if we were successful at producing a growing number of aspiring entrepreneurs, billions and billions more could come into VC funds. 

Venture capital has shown us how much impact a small amount of capital can have; imagine what we could do with a large amount of it.