VC: An American History

Tom Nicholas teaches at Harvard Business School and wrote the first serious history of American venture capital, tracing the practice of financing high-risk ventures for extreme returns back well before the industry existed.

His opening comparison is nineteenth-century whaling, which he treats as the closest structural precursor. Whaling voyages were financed by agents who assembled capital from investors, selected captains, and produced return distributions in which most voyages lost money and a few returned enormous multiples. New Bedford agents developed the practices that recur: specialisation, selection of managers, syndication of risk and the acceptance of a skewed return distribution.

The modern history covers the wealthy families including the Rockefellers, Whitneys and Phippses who financed technology ventures before the war; the founding of American Research and Development in 1946 by Georges Doriot and its Digital Equipment investment, which returned a multiple that defined the industry's arithmetic; the Small Business Investment Company programme, which was a policy failure that nonetheless trained a generation of investors; the shift to the limited partnership structure; the 1978 clarification of pension fund investment rules that supplied the capital base; and the subsequent development through successive technology cycles. Nicholas is careful about the role of government, which appears throughout as a funder of research, a purchaser and a shaper of tax and pension rules. The book is scholarly and readable and is the standard history.