A (very) Brief History of Venture Capital
The adventure that is venture capital has become part of the global business narrative. That may be because venture capital is the natural extension of the capitalist investment model. As such, it fits nicely into the bigger picture. But, VC is no bolt-on; there’s plenty in the venture capital story worth discovering. In this blog we’ll tell the story of venture capital, taking you from the earliest investments at the start of the 20th century to Australia's startup scene today.
The earliest known forms of modern venture capital were started in the US in the early 1900s. Then, it was mostly a club of wealthy families trading equity in each others startups. But the idea of a small number of wealthy investors getting in early with new companies and scoring large ROIs soon gained traction.
The end of World War II saw plenty of fighting spirit unleashed in the economy and, as a result, the numbers of startups and VC players grew. One of these was ARDC, founded by the same Harvard don who started the top management school INSEAD. ARDC actually looked to invest in the projects of those who fought in the war. As such, this was both philanthropically-motivated and also aimed at new and small ventures.
These factors became the foundation of the VC model we see today.
With pro-investment legislative changes in the US designed to encourage small and medium business development, the sector became more professional and hit some significant home runs. Those wins included the return in 1968 of over $300 million on a $70,000 investment in Digital Equipment Corporation.
Many of the more prominent VC firms set up around the Menlo Park area in the Bay area of San Francisco. When the boom in computer technology was heard, many were attracted to the possibilities, driving early tech startups to cluster in and around what became known as Silicon Valley.
Today, the successes of Silicon Valley are legendary and most, if not all, of the big names in computing, software and IT today can thank the VC star-makers who funded their early runs.
The stellar success of Silicon Valley has prompted many governments around the world to attempt to replicate it. This strategy, often backed by various forms of sovereign investment, is fraught with danger as the US model of technology development is reliant to some extent on timing and location factors, things which can’t be duplicated.
In Australia, the endeavours of various governments – both state and federal, to incubate a kind of Aussie Silicon Valley has been ongoing for some decades. The most recent federal budget has raised questions over its general approach to startup investment as it initiates support for medical research on one hand, but has ended support for government startup programs on the other.
Overall, venture capital in Australia is seen by some insiders as a flop. Matt Barrie, CEO of freelancer.com told Fairfax Media last year that the local sector was in “dire straits.” He is perplexed by falling capital investment, “in the middle of the greatest technology boom of our time.”
Another commentator, arguing that low deal turnover is among the factors working against a booming VC sector in Australia, wrote: “I think we can happily assert that the VC sector in Australia has been a financial failure and that it also has had somewhat dubious economic impacts.”
The above writer suggested that, among other things, the lack of deal flow in Australia is an important barrier to a more successful VC culture here.
If this is a fair criticism, it makes the efforts of those startups and founders at The Big Pitch all the more important. If pitching your company successfully also helps build a firmer platform for a more sophisticated investment infrastructure in Australia, that's got to be a positive side-effect.