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The old oil and steel fortunes of families such as Rockefeller, Whitney and Phipps provided the bulk of the money for the venture capital market until the early 1960s. The Phipps family's fund, Bessemer Venture Partners, was an early investor in International Paper and Ingersoll-Rand. Laurance Rockefeller in 1938 helped start both Eastern Air Lines and Douglas Aircraft. When younger members of the Rockefeller family decided that they wanted a part of the action, a broader risk fund called Venrock was created in 1969. It has since made lucrative investments in both Intel, a successful semiconductor manufacturer, and Apple Computer. One venture that did not work out was Advent Corp., which filed for bankruptcy when its big-screen TV sets did not sell. Admits Managing Partner Peter Crisp, 48: "We have some companies that have lost money, of course, but no really big bloopers."
Throughout the 1960s, however, money from large banks and corporations joined the old family funds. Citicorp,
Bank America Corp. and other bank holding corporations began to create small business investment companies to fund new ventures. Lured by the potential profits, large corporations, including Exxon, General Electric and Texaco, also started setting up venture capital subsidiaries. In addition, pension funds, insurance companies and universities with large endowment funds began looking for new companies as a way of earning a higher return on their pools of cash. Big banks, corporations and other institutions now provide 83% of all the grub stakes for new firms. The venture capital firms owned by families still seek out the riskier startups, while major companies and banks frequently provide money for the second or third round of financing.
The current boom in venture capital is in sharp contrast with the situation in the early 1970s. At that time, a plunging stock market, the failure of scores of high-technology companies and federal tax increases on capital gains almost dried up the venture capital market. The money faucets again began to open up three years later with the passage of a new tax bill that lowered the rate on capital gains from a maximum of 49% to 28%. The amount of fresh capital immediately jumped from $39 million in 1977 to $570 million in 1978.
The flood of new money and the well-known success stories have created intense competition to find and fund new ventures. "Five years ago, we could take a month to study a company," says Bert McMurtry of California's Technology Venture Investors. "Now we have to be prepared to do the work in a couple of weeks." No longer can a financier sit in his office and wait for businessmen to come to him. Some regularly stroll around new industrial parks and poke their heads through doors to look for companies that have barely had time to hang out a sign.
Nowhere is the venture capital pace faster than in Santa Clara County, Calif., where genetic-engineering firms are growing up alongside already successful semiconductor manufacturers. The area once known as Silicon Valley has now been dubbed Siliclone Valley. Over the past ten years 28% of all U.S. companies that received venture capital financing were based in California.