Venture Capital—Patronage to Apprenticeship to Profession

Abstract

Investing in creative or entrepreneurial ventures is part of the human condition and goes back as far as recorded history. The patronage of the Medici family of Florence supported the work of Leonardo de Vinci, Michelangelo, and Galileo. Queen Isabella was essentially a venture capitalist, supporting Christopher Columbus in his exploration of the New World. Many of the critical inflection points in modern history that had dramatic impacts on the human condition resulted from entrepreneurial initiatives supported by wealthy individuals and families. The history of modern venture capital was catalyzed by efforts at mobilizing capital for the many companies emerging after World War II, in part from both necessity and opportunity—the need to support the GIs returning from the war and the opportunity to commercialize the new technologies that resulted from the war effort. Commercial access and use of the Internet represents the latest catalyst for the acceleration in entrepreneurial activity around the world, with a corresponding growth in individuals investing in new ventures, as well as new funds. Unfortunately, the process of underwriting an entrepreneurial venture remains much like it was in the time of Leonardo de Vinci and Columbus: Energetic entrepreneurs convince a supporter (investor) of their vision and seek to share the rewards with the supporter, should there be any rewards to share. Investing was, and largely continues to be, transacted on a case-by-case basis. Ironically, there has been little innovation in the very funding mechanism of entrepreneurial finance. This has led to a critical shortage of early stage risk capital in various regions around the United States where historically blue-collar jobs have been disintermediated by technological advancements, but capital has not been available in these communities to support the new (digital) jobs that would replace those old jobs and provide hope for the next generation residing in those communities. This article will review the history of venture capital, explore the ineffectiveness of the historical model, and explore some of the innovative initiatives to improve the effectiveness of venture capital, thus funding more startups more efficiently and in more communities while delivering better risk-adjusted returns for investors.

TOPICS: Private equity, portfolio construction, financial crises and financial market history, performance measurement