Venture capital

Venture capital (VC) is a form of private equity financing or funding for emerging companies. Venture capital firms or funds invest in these early-stage companies in exchange for equity, or an ownership stake, in the companies they invest in. They look to invest in companies considered to have high growth potential or have demonstrated high growth (with growth being calculated or considered by the number of employees, annual revenue, or scale of operations of the company). As well as funding, VC firms will offer technical and managerial expertise to the companies they fund to help them grow.

Venture capital deals tend to differ from other private equity financing deals because VC focuses on emerging companies seeking substantial funds without a track record of success used by other forms of private equity to determine the value of the company. Forms of evaluation used by private equity firms include revenue statements, a track record of operation, and a proven business model. Whereas VC firms will instead invest in the potential a company offers, the potential of a product-market fit, and the potential of the founders and founding team. The founding team is one area where a track record of previous success can help a new company acquire funding. VC firms tend to look for these emerging companies with higher potential in the hope of achieving above-average returns on their investments. For companies, VC funding has become an increasingly popular way of raising capital, especially in cases where they lack access to capital markets, bank loans, or related debt instruments.

Due to the nature of venture capital, it has many characteristics that make it unique compared to other market-traded instruments or forms of private equity. Venture capital tends to be illiquid, as the investments are made with long-term windows that do not offer the opportunity or option of a short-term payout, unlike publicly traded securities, while the success and failure of a VC firm depend on the success of the firm's portfolio companies. Often the time between the initial investment and the final payout has a time horizon of ten years, which increases the liquidity risk, but in return for this increased risk, VC usually compensates its investors with higher prospective returns.

Similarly, unlike other standard investments that are traded on public exchanges, VC investments are held in private funds. This means there is no way for individual investors to determine the value of an investment, while the fund may not understand how the market will value the company, which can lead to large discrepancies and widespread speculation from the buy-side and sell-side in the case of an IPO. Similarly, the founders of a company and the VC investors may lack information about the market they wish to enter, which comes with high risk; as such, VC investors and the company founders will typically work in relative darkness to keep their work a secret.

Another characteristic of VC can be the mismatch between an entrepreneur and their investors. For example, an investor may be focused on the return an investment offers, whereas the entrepreneur is focused on the process. This can lead to challenges in the relationship between investors and entrepreneurs, especially when questions arise regarding how the company should be run.

A venture capital firm is a collection of investments from a variety of investors with the purpose of investing in high-growth potential start-ups. The firm is charged with making investment decisions on behalf of their investors, and they tend to have stated theses and criteria upon which they invest. For example, a VC firm may invest solely in a specific industry or at a specific stage of a company's growth. Or both.

A simplified structural view of a venture capital firm.

A venture capital firm is operated by general partners (GPs) who are charged with making the investments, managing the fund, and capitalizing on the investments. They invest on the behalf of the limited partners, who are the investors in the VC firm's funds, and will often end up sitting on company boards as advisors to their portfolio companies. These general partners receive an annual management fee of up to 2 percent of the total capital invested, and they usually receive 20 percent of the profits as a performance incentive (also called a "carry"). This is known as a 2 and 20 structure, with the remaining 80 percent of the profits divided pro-rata among the limited partners.

Besides the general venture capital firm discussed at length above, there are some smaller, off-shoot types of venture capital firms and venture capital providers. These can include groups as small as individual investors, also known as angel investors, or can be strategic or corporate venture capital firms that invest on behalf of a large corporation rather than a limited partnership of investors.

Although not technically a VC firm, angel investors play an important role in the VC funding scheme. In some cases, there are firms established that include networks of angel investors in which a start-up can pitch to a group of angel investors, or otherwise include a group of angel investors investing together as a fund. The key difference between an angel investor and a VC firm is the angel investor tends to be an individual investor engaging with the start-up. These investments are usually smaller investments, and angel investors tend to take a less hands-on role compared to VC firms. A company may start with angel investors that are nothing more than friends and family.

A micro VC fund or firm is not too different from a traditional venture capital firm, but they tend to be more specialized than traditional VC firms, with a focus on a specific sector or stage of company development. This can include a more hands-on approach to working with portfolio companies, although they also usually include smaller sums of money and invest very early in a company's growth stage. However, these firms tend to be comprised of entrepreneurs and founders looking for new opportunities, which, for a start-up looking to bring on more expertise, can be beneficial; but for a start-up looking to maintain control, this arrangement may be less beneficial.

Crowdfunding is not strictly a form of VC, but it is an alternate form of capital raising that a start-up may look for. And with new technology, some crowdfunding platforms offer individuals that do not classify as high-net-worth individuals a chance to invest in a company for a smaller equity share. However, generally, a crowdfunding platform will raise less money for a company, and while there will often be less expectation for an equity share as part of the transaction, there tends to be an expectation for the resulting product or service at a relative discount (if not for free), depending on the structure of the crowdfunding platform. These normally have shorter terms to their investment deals and carry more risk to the individual than the company. Crowdfunding can also be part of a company's marketing plan, as it tends to offer the start-up more publicity.

A subset of venture capital firms, corporate venture capital (CVC), is a VC firm that makes investments on behalf of large companies wishing to strategically invest in start-ups. Often these investments are into start-ups within or adjacent to the corporation's core industry, and the investments are intended to help the corporation gain a competitive advantage or increase revenue. Unlike VC investments, CVC investments are made using corporate dollars rather than capital raised from limited partners. Further, the investments made on the part of a CVC may be made with an intent to acquire the start-up if their product or service is proven viable.

A venture capitalist is a person who works for a venture capital firm. These are typically individuals who evaluate companies in search of high-growth opportunities and invest money and their expertise in the business in exchange for equity. These venture capitalists usually have investments in the VC firm they work for. These individuals can then make money off of the return on their investments; otherwise, they earn a salary off management fees assessed by the VC firm. Venture capitalists are more commonly known as general partners.

A venture capital fund is the investment fund that is run by venture capitalists and undergirds their investments. Depending on the structure of the VC firm, a firm may raise funds based on specific investment themes and criteria, raise funds solely for their already stated investment criteria and themes, or may otherwise operate a rolling fund the VC firm operates from. A typical venture capital fund has a lifespan of ten years, at the end of which the fund liquidates and money is returned to the investors.

VC funds have similar structures, although the overall fund type may dictate parts of it. Generally, a management company is responsible for managing a VC firm's operations across funds. The management company collects fees, pays expenses, and sometimes owns the fund's trademark and brands, often being the same entity as the VC itself. In some cases, the management company can be a single-member company, while others are multi-member companies. Overall, there needs to be a GP, who is responsible for the active management of the fund and filling and signing tax returns, who also have unlimited liability for the fund. However, the larger the fund, and the larger the associated VC firm, the more convoluted this structure can become, including multiple general partners.

The venture fund structure overview.

Besides the general partners, there are the fund's limited partners. These are usually the passive investors in the fund and include high-net-worth individuals, pension funds, foundations, and insurance companies. The liability of the limited partners is capped at the amount of capital the limited partner contributed to the fund. The final part of the fund structure is the portfolio companies, which include any of the companies the fund invests in.

Investments into these funds generally come from high net-worth individuals but can also come from private and public pension funds, endowment funds, foundations, and corporations. Those who invest in the venture capital fund are known as limited partners, as opposed to general partners. The relationship between those who invest in a venture capital fund and the fund itself depends on the fund's structure, but it is not a short-term relationship. The average fund and its investments will run from five to ten years, meaning the general partners and other technical experts work with invested companies for that period of time, while investors in the fund wait for their investment to be repaid. Once the venture capital fund exits the investment and the fund is dissolved, those who invested in the fund receive their return, which they hope is significantly more than their initial investment.

Those interested in investing in a venture capital firm have to meet specific requirements. These are specific to the country or region the individual is operating. In the United States, these requirements include that the prospective investor must have an individual or joint net worth in excess of $1 million (which cannot include the value of their primary residence); the prospective investor has to have an income in excess of USD $200,000 or joint income in excess of USD $300,000, often for the two most recent years and with a reasonable expectation of reaching the same level in the current year; or the prospective individual investor can be holding a Series 7, 62, or 65 license.

The fund then may have its own requirements, which may be dependent on the structure of the fund, the investment thesis of the fund, how much it hopes to raise, and other considerations. Many funds have a minimum investment amount, with some rolling funds having as low of a minimum investment as USD $1000; whereas a traditional fund will typically have a larger capital commitment, with some suggesting the average minimum ranging from USD $25,000 to $100,000.

The requirements vary, both depending on the type of fund, the region the fund originates in, and the area the fund operates in (if the fund has a geographical focus outside of the area of origination). However, the typical documents required in a VC fund include the limited partnership agreement, a private placement memorandum, and a subscription agreement.

In any venture capital firm, there tend to be similar roles, often using similar or the same names to help people understand their roles. Some firms will add different roles or names along with these common types. What these roles, their titles, and their responsibilities depend on the given VC firm. Common roles in VC firms include general partners, venture partners, principals, associates, and entrepreneurs-in-residence.

Part of a VC firm's job is sourcing opportunities with high-growth potential companies. Firms face an existential threat if they are unable to source new deals and find new high-growth companies. Because of this, VCs will go to great lengths to improve the quality of their deal flow. Successful VCs tend to have a strong network to help them capture investment opportunities and a brand that generates a stream of inbound deals.

A simplified view of the venture selection process.

The network of a VC is arguably their best source of deals, and because of this, most VCs try to cultivate a rich and diverse network. This network is expected to connect them to promising founders and start-ups that meet their investment thesis. To cultivate the network, VCs will work with each other and invest jointly in companies, sit on boards together, and attend industry events. They may invite others in their network to invest in rounds or refer start-ups that may be mismatched for their firm's investment thesis. Firms also rely on professional networks of various individuals across industries and roles they have worked with previously in growing and selling start-ups.

Accelerator programs offer a type of entrepreneurship boot camp for founders. They offer various types of programs for founders of various stages, including those at the stage of idea generation and needing a founding team and for founders with a viable product looking to connect themselves to a network or hone their ideas. These accelerator programs maintain relationships with VCs, often becoming joint investors, especially as the success of companies coming from a given accelerator program helps increase the prestige and notoriety of the program—let alone their own investments—and can further attract other founders and start-ups and ideas.

Universities, especially those with MBA programs and entrepreneurship centers, can also be a good source for VC. Often VCs will work to maintain a bridge or connection to these centers and universities, and, for the universities, such a connection can be beneficial in attracting students to their programs. One example of a start-up that began as a school project is DoorDash, which would go from a Stanford Business School project to raising more than $2 billion and receiving a nearly $13 billion valuation.

Sourcing deals from a network, an accelerator program, or universities may not be enough to gain exposure to the high-quality deals or companies they want. Therefore, it can be imperative for a VC to establish a robust brand. The brand of a VC firm can improve the flow of inbound deals, which are largely companies pitching the VC firm without prior connection. For the VC, there tend to be two main ways to differentiate themselves from their peers: thought leadership marketing and "value-add" services.

In becoming thought leaders, VCs can attract communities of entrepreneurs and other investors to look at them for their expertise and authority. To do this, the VC firm or its leaders may build out platforms with their writing, blogging, tweeting, and public speaking to market themselves and their associated firm as thought leaders in a given space. One of the common ways for VCs to establish themselves as thought leaders is in discovering "narrative violations" in which the VC may challenge a commonly accepted narrative.

Pairing this thought leadership with "value-add" services can be an appealing mix to lure start-ups. These services can be anything a VC firm offers start-ups beyond capital. This can include mentorship, access to their network, and technical support. Some may offer teams dedicated to helping start-ups with product design and marketing, while others may hold conferences and mentorship programs for early-stage founders, which can help a start-up grow its network and relationships beyond the firm itself.

For a company looking to generate interest and attract venture capital funding, the process can look similar and different from that which is undertaken by a VC firm. Especially as it is rare that a VC firm or an angel investor will stumble across a new company, and if the founder is not well-networked, it can be harder to attract VCs. However, there are some ways a founding team and a young company can attract investment. These include the following:

Participating in a business incubator or accelerator program, as they tend to have relationships with VC firms, some even have pitch days where VC firms can come and watch the graduates of the program offer a presentation of the company they have worked on during the program.

Some VC firms will host young companies, offering start-ups and founding teams a chance to present the unique opportunity their business holds without necessarily requiring the founding team or start-up to have previous connections with the VC firm. Whereas other firms may require that connection in order to not be inundated with potential pitches.

Underscoring all of these potential ways of interesting VC funding, and in itself a valuable way of generating interest, is the pitch deck. A pitch deck is a short presentation, often a PowerPoint presentation, in which the founders can present the technology or concept in development. This usually includes a comprehensive business plan (in brief) explaining how and when the business is expected to make money, as well as a breakdown of the specific market the start-up is looking to partake in, including the specific segment of the market, with detailed analysis of how they plan to enter the market, and the piece of the market share they expect to gain. The pitch deck is perhaps the most vital piece for a start-up to generate attraction, as it offers an introduction to the founders and their plan, and from the presentation of a pitch deck (even through email), a VC firm will decide to take the next steps.

When entering into a financing agreement with a venture capital firm, the VC firm and the company receiving financing will enter into an agreement dictated and described in several documents. These venture capital equity financing documents offer the deal structure, the economics, and the control offered to investors and founders of the start-up. In this structure, economics refers to the return the investors receive in the event of a liquidity event; and control refers to the mechanisms an investor has to either affirmatively exercise control over the business or veto certain decisions a financed company makes.

In some cases, these documents will be standardized, with some of the more well-known VC firms having created standardized deals to help consistency among deals and speed the funding process. Others will have proprietary documentation, based either on the specific company (or industry) or based on internal philosophical approaches to structuring financing deals.

Venture capital can be broadly divided based on the growth stage of the company at the time of the receipt of financing. Generally, the younger a company is, the greater the risk to the investors. The broad stages of VC investment include the following:

The various stages of venture capital financing and the type of investments common at those stages.

The earliest stage of investment comes at a time when the founders of the business are working to turn an idea into a concrete business plan. Pre-seed investment can include enrollment in an accelerator program to secure early funding and mentorship, funding from a micro VC firm or angel investors. The pre-seed stage works to prove a product-market fit, test interest, and see where the market for a specific product is. Often this stage involves the issuance of convertible notes, equity, or preferred stock options and can be considered the riskiest stage of investment.

Seed stage funding offers money to support a company during its first expansion phase. Often this stage includes significant funds meant to address capital needs for the business's operations. This can include expanding hiring, marketing, and operations once a company has a minimum viable product or service and has some proven fit in a given market. This can include the seed stage and can include a company's series A round as well.

Following a company's seed stage—which can be the company's initial round of VC funding—comes early-stage funding. This includes funding rounds typically designated as series A, series B, and series C rounds. This funding works to help the funded company get through its first stages of growth and ramp up business to expand and develop. By this point, the company generally has a customer base, and the funding amounts of these rounds are typically larger as the company is growing. This stage can also be known as the expansion stage of a company, especially as during this stage, a VC firm may be looking for the company to show consistent income, a history of expansion, and a plan for growth beyond domestic markets.

The late-stage funding of a company comes after its series C round and can include rounds designated from series D and on, as far as a Series K. These rounds are reserved for more mature companies with a proven product or service, proven growth, and are generating revenue but may not yet be profitable. This is also known as the bridge or mezzanine stage of a company's growth.

Funding provided at this stage of a company's growth is also used to help a company looking to go public. These rounds can be raised to help a company drive down prices, suppress or acquire competitors, and create favorable conditions under which to take a company public. It has become more popular for companies to stay at this stage longer before moving forward with an IPO (if they move forward at all).

At some point in the company's growth, investors may wish to exit their investment. This typically occurs during an IPO, as the private investor's shares can be sold on the open market, often for a healthy profit on their initial investment. An IPO is considered an ideal time for an investor to exit as founders keep control of the company while investors are able to enjoy high profits. However, mergers and acquisitions also offer a chance for investors to sell their shares for a profit; however, unlike an IPO, the founders can give up control in the event of a merger or acquisition.

An exit can occur, depending on the terms of the deal, at almost any time. In this way, it is not necessarily a stage in the venture capital financing cycle so much as it is the end-goal of a venture capital firm. During an exit phase, though, a venture capital firm looks for a healthy return on its initial investment.

VC has established itself as one of the more significant and well-known asset classes within the private equity space, while the companies they have funded have gone on to redefine industries. This has led to VC firms growing in their own prestige and public image, with individual investors and firms gaining wide recognition. As a result of this, the VC industry has seen a growth in the number of participants and professionals, including corporations developing venture arms to participate in capital generation and celebrities joining the venture industry. Despite the increasing interest and increasing amount of players in the space, the core principles to successful venture capital remain largely the same.

These principles work to guide venture capitalists and their associated firms and funds in generating healthy returns. Returns are, at the end of the day, the main criteria for judging the relative success and impact of a venture capital firm and its investments. However, generating these returns consistently can be complicated, with some criticizing venture capital firms for creating a bubble that incentivizes companies to exist in "growth" stages for as long as possible rather than to incentivize good performance and that the bubble is ready to pop at any day. Some of this criticism comes from the lackluster performance of various VC firms. However, this performance may have less to do with the incentives placed on the company receiving the funding but comes as a result, as some have suggested, of a VC firm not following the core principles of VC investing.

One of the more confusing and perhaps difficult principles for some in VC investing is that in venture capital, "home runs" are more important than averages. This means when a VC firm assembles a portfolio of companies, the majority of the return on the portfolio of investments will come from a few of those companies. This means, for a venture capitalist, failed investments do not matter as much as they would seem to, and every investment should have the potential to be a "home run" investment.

The "home runs" are often expressed in a power law curve in VC.

This is an important aspect of VC funding, as most companies fail. For example, the United States Department of Labor has found that in the first five years, the survival rate for all small businesses is roughly 50 percent. As more time passes, this falls to 20 percent. Meanwhile, a study spanning 2004 to 2013 found that 65 percent of venture capital deals returned less than the capital invested. Counterintuitively, the larger VC firms and funds had more failed companies in their portfolio than those generally judged mediocre. But, those larger and more successful funds all had home-run investments in their portfolios.

A home run investment is generally defined as an investment that returns outsized results. For example, a fund that returns above five times, often less than 20 percent of the deals produce roughly 90 percent of the funds' returns. And not only do the larger VC firms have more home run investments—and more strikeouts—but their home runs tend to be of greater magnitude. This is one way in which venture capital differs from traditional asset management.

The above phenomenon has been described as the "Babe Ruth effect." Babe Ruth, the famous baseball player, was known as one of the greatest baseball players of all time, with his batting ability making him famous. He set multiple records, but what is less well-known is that he struck-out or missed the ball a lot. Babe Ruth was not unaware of this, and he was noted as suggesting his batting style was to hit big or miss big. Similarly, VCs should look to invest in those companies that display the potential for outsized results rather than worry if they fail. How a VC firm decides which investment opportunity presents a "home run" opportunity will be based on their individual analysis and portfolio strategy.

Expression of the "Babe Ruth effect".

However, regardless of what metrics or data sets are used to evaluate an investment opportunity, the probabilities of a home run are low. One data set showed less than 5 percent of investments return above ten times the investment amount, and only the smallest fraction are above the fifty times return category. This has led some VC firms—notably 500 start-ups—to look at the problem as one of "at bats," or the more opportunity the VC firm has to hit the "ball" (or invest), the more opportunity they have to score a home run. However, most VC funds do not follow this strategy; rather, they tend to engage in one to twenty investments per year.

To get around this problem, many VC firms, especially those without the capital or interest to invest in a large number of companies, tend to look for better "quality" investments. To do this, VC firms will have technical and industry experts who work with them, they will narrow their investments down to specific industries they understand well, and they offer their portfolio companies management and technical expertise (along with capital) to give those companies a greater chance to succeed.

Following from the above, that means a VC firm—regardless of whether they are trying to invest wisely or trying to pick companies they believe have a chance of success and then further cultivate them—undertakes an analysis process to better maximize their chance of landing a home run investment. What one VC firm looks for in a company may be different than another, with many suggesting the practice of choosing investment opportunities is more of an art than a science. However, there remain some general criteria upon which most investors tend to judge a company. These include the founding team, the addressable market size, the scalability or operating leverage, an unfair advantage, the timing, and follow-on strategies.

An investment decision is characterized as an assessment of two main factors: the idea and the people behind it. Many VCs place a greater emphasis on the team behind the idea, rather than the idea itself, with many arguing that "good" people wrong about a product are more likely to switch, whereas "bad" people (however that may be determined) with a good product will not be able to change the disagreeable parts of themselves in the way a product can be changed. Further, studies have found that the founding team can be marketable, with more information provided about founders who can draw greater interest than information about the product or service they are building.

For an investment to have the potential for outsize returns than the product or service the company is building, it has to have a large addressable market. VC firms evaluate companies on the potential addressable market; more so, they judge the founding team on their understanding of the dynamics of the market they are addressing and have an understanding of the value chains and the competitive dynamics of the market they are tackling and where they fit in and have an opportunity to grow in that market.

Investors look for companies with the potential (or track record) of exponential growth with diminishing marginal costs, especially where the costs of producing additional units shrink. This effect allows the company to scale quicker, engage more customers, and increase cash flows, which can then be used to spur further growth. This is harder to assess in earlier stages of a company and can be a part of the "art" of investing in a company. But this tends to be why VC firms prefer to invest in technology companies—because their operating leverage helps them scale faster and more easily than companies that do not rely on technology.

As the name implies, VC looks to invest in companies that have an innovative strategy or approach to tackle the large incumbent corporations in their space—especially as those incumbents tend to have deeper pockets and more experience. An investor, therefore, looks to start-ups to have innovative strategies in this regard. This advantage can be further subdivided into three categories: product, business model, and culture.

• An "unfair" product—In this case, the product uses a new approach to solving an old problem, which undercuts incumbents. For example, Waze used actual users to generate its maps for free, rather than use the traditional, costly methods other geo-mapping companies used.
• An "unfair" business model—In this case, the start-up may look at the "traditional" way of doing business, especially where it may be a costly way of doing business, and instead develop a new or slightly attenuated model. Depending on the industry, a response from incumbents could result in them cannibalizing their existing business model, which creates a further advantage for the start-up. One example of this is Dollar Shave Club, which approached razors with a direct-to-consumer subscription model and a lean, viral marketing campaign to offer razors at a fraction of the cost of their competitors.
• An "unfair" culture—The above examples will be driven by a culture that is more focused on the start-up than it is as the incumbent competitors. The typically smaller and more focused team of a start-up can then move and develop faster than a larger, more established company necessarily can.

A company's success can come down to timing, with some studies suggesting timing accounts for 42 percent of the difference between a company succeeding or failing. Timing is often understood as the business model riding a macroeconomic or cultural wave, such that it appears to meet or satisfy an otherwise unsatisfied need. Or that it is a unique opportunity that arrives at the perfect moment, making its success look almost guaranteed.

Another common strategy to try and generate success in a VCs portfolio is the follow-on strategy. In this case, follow-on refers to the ability and willingness of a VC fund or firm to invest further capital into future fundraising rounds of portfolio companies. If only a few investments end up being home runs, then it is imperative that a VC firm identifies those companies and double down on them with further funding. However, the timing of a follow-on strategy can be as crucial as the strategy itself. Generally, a VC firm wants to identify companies with the potential to be a home run when the prices are low and right before the company explodes in valuation. Once the valuation of the company begins to run away, the cost of the investment does not buy any meaningful ownership increase compared to what the VC firm already has achieved.

Depending on an individual's position, there are various advantages and disadvantages of venture capital. These may lend themselves to a company interested in raising funding from a venture capital firm or dissuade the same company from turning to venture capital and instead using some other financial instrument to accelerate growth or otherwise relying on "organic" growth.

Perhaps the most obvious benefit of VC is the injection of cash that a company receives from a venture capital firm. This funding can help a company develop a product, develop a customer base and market, or hire to help the company scale beyond its organic capabilities. This is the primary focus and primary advantage of VC. Many companies, without VC, would arguably fail at their earliest stages, especially if their founder's capital reserves are not deep enough or the product requires further development and refinement. VC funding can offer a company a longer runway necessary for the development of a product or a market.

Aside from the financial backing, VC funding can offer a start-up or young business a source of guidance and consultation. This can help with various business decisions, including financial management and human resources management, which can be vital for a small and young company.

VCs offer businesses "value-add" services. As discussed above as part of a VC's strategy to attract young businesses and start-ups, these services can be vital for a young business in a number of critical areas, including legal, tax, and personnel matters. A start-up may otherwise lack some of these resources, and a VC offering them can provide the company with time to find the right personnel at key stages of company growth. Further, these services and resources can help a company grow faster and with more success than it otherwise may have.

VCs are all about connections. Connections help them find the right companies, source deals, boost funding for each other, and can be of benefit to the companies they are funding. These networks can help their portfolio company find other funding opportunities, find capable personnel for the start-up's staffing needs, and can help businesses grow and extend their ideas with meaningful support and connection amongst other founders.

With VC funding comes a necessary loss of control. The trade-off of equity for funding may be a fine trade-off for some, but for others, the loss of control and the intrusion of others on their business and their vision may be otherwise unconscionable. With the injection of cash comes professional investors who will want to be involved and may be aggressive. For some start-ups, this is exactly what they want. For others, this may begin to feel hostile and unwelcoming. The size of the stake an investor has in the company can also go a long way to determine the say the investor has in shaping a company's direction. And with more capital committed, the more interested the investor will be to see the company grow and succeed.

Depending on the size of the VC firm and their stake in the company, along with their interest in the company, they could take eventually take more than a 50 percent stake in the company. In that way, the VC firm will effectively become the majority owners of the company, and the founders may lose management control, effectively giving up ownership of their own business. However, some founders may want and expect just this kind of ownership status, seeing themselves less as founders and as much as initial investors in an idea.

Georges Doriot.

Venture capital is a subset of private equity. But, where private equity can be traced as far back as the nineteenth century, VC developed as an industry in the wake of the Second World War. Harvard Business School professor Georges Doriot is largely considered the father of venture capital, based on his work and achievements. He founded the American Research and Development Corporation in 1946 and raised a $3.58 million fund to invest in companies that commercialized technologies developed during the Second World War. The first of these companies was one intending to take X-ray technology and use it for cancer treatment. Doriot's initial $200,000 investment would turn into $1.8 million when the company eventually went public.

One of the arguably important steps in the development of a professional venture capital industry was the passing of the Small Business Investment Act of 1958. The Act officially allowed the U.S. Small Business Administration (SBA) to license private small business investment companies to help the financing and management of small entrepreneurial businesses across the United States. The Act included tax breaks that contributed to the rise of private-equity forms.

Arthur Rock.

It would not be until Arthur Rock, a pioneer of Silicon Valley during his period raising money for Fairchild Semiconductor would the term "venture capitalist" be introduced, which would then become widely accepted and used in common parlance to refer to the above-described activities.

During the 1960s and 1970s, venture capital had a focus on starting and expanding companies that were, more often than not, exploiting breakthroughs in electronic, medical, or data-processing technology. This resulted in venture capital creating an early association with the financing of technology ventures.

Also in the 1960s emerged the common form of private-equity fund that remains in use. Private-equity forms organized limited partnerships to hold investments in which the investment professionals would serve as the general partner, and the investors in the fund served as passive limited partners. The compensation structure of these funds today also emerged at that time. Meanwhile, through the 1970s, a group of private-equity firms focused primarily on venture capital investments would emerge, and they would become the template for later venture capital firms. With the number of new venture capital firms increasing, the National Venture Capital Association (NCVA) was founded in 1973. The NCVA served as an industry trade group for the burgeoning industry. The industry would experience a minor setback when, in 1974, there was a stock market crash.

Four years later, in 1978, the venture capital industry would experience its first major fundraising year, as it raised approximately $750 million. This came as specific restrictions of the Employee Retirement Income Security Act of 1974 were relaxed, allowing corporate pension funds to invest in the asset class and providing a major source of capital for venture capitalists. This and major successes through the 1970s and early 1980s led to a proliferation of venture capital firms. Where there had been a few dozen at the beginning of the 1980s, the end of the decade saw over 650 firms; the money managed by these firms increased from $3 billion to $31 billion by the end of the decade.

However, another stock market crash came in 1987, which saw firms begin to experience sharp declines in their returns and certain firms post their first losses. Increased competition and foreign corporations began to flood early-stage companies with capital. But the changing conditions following the 1987 market crash led to many corporations selling off or closing their in-house venture arms, and venture capital companies and units began to shift their investments from high-risk, early-stage companies to more mature companies.

At the end of the 1980s, venture capital returns were low in comparison with other financial instruments, and growth in the industry was limited until the advent of the World Wide Web in the early 1990s. This reinvigorated venture capital, as investors saw potential in the new companies being formed to take advantage of the new technology. Companies like Netscape, Amazon, and Yahoo! were funded by venture capital and generated enormous returns for their venture investors as they turned public. This caused a rush of money into venture capital and saw the number of venture capital funds increase from about 40 in 1991 to more than 400 in 2000, and saw the amount of money committed to the sector from $1.5 billion in 1991 to more than $90 billion in 2000. The burst of the internet bubble, also known as the dot-com bubble, in 2000 caused many venture capital firms to fail, and the entire sector saw declining financial results.

In the wake of the Dot-com bubble, venture capital struggled and slumped through the first part of the decade as valuations for start-up technology companies collapsed, with many funds "under water," and venture capital investors sought to reduce the size of commitments they made to venture capital funds. This would continue as the 2007-2008 financial crisis—also known as the Great Recession—would cause a further tightening of venture capital funds. However, in the wake of the Great Recession emerged the unicorn—a private start-up with a value is over $1 billion. The potential for a unicorn increased venture capital interest, attracting a diverse pool of investors who sought returns in a low-interest-rate environment, including sovereign wealth funds and major private equity firms.