A venture capitalist provides funding for start-up companies that are not able to get money through traditional bank loans in order to get their businesses off the ground. In return for this generosity of funds, the venture capitalist has a major stake in the company and makes decisions as they see fit so that the company can turn a considerable profit and make them, and the company, money.
Most venture capital funding is given to what can be considered high-risk businesses, but with the potential of making a huge amount of profit. Many of these companies deal with technological advances that are sure to be in high demand, once production and operation begins.
Back in medieval Islamic society, partnership arrangements were made that highly resemble that of the current form of venture capital funding. But venture capital really took off right after World War II. In 1946, the American Research and Development Corporation (AR&DC) was formed and founded by General Georges Doriot, a U.S. Army General and businessman who was born in France, but educated at Harvard.
In 1957, Doriot’s AR&DC invested $70,000 in venture capital to Digital Equipment Corporation. From his investment, the company was able to begin operation of their business, which grew to a value of $355 million. The company went public in 1968 and gave AR&DC a 101% annual rate of return. This extraordinary outcome represented everything that should result in venture capitalist funding.
Congress passed the Small Business Investment Act of 1958 bringing the Small Business Administration into the picture. The Act gave licensing to Small Business Investment Companies (SBICs). Congress recognized that before World War II, only the very wealthy or families of a company’s founders gave any venture capital for businesses that were trying to bring about new technology.
They knew that in order for the economy to grow and for the country to be competitive in the global technological world, they had to do something to encourage venture capitalist activity.
The Present Days
By the end of the last century, venture capitalist investing took off as more and more businesses were entering the information technology industry. As Silicon Valley became the hub for all things high-tech, it also became the core of venture capitalist investing. Unfortunately, due to the sensitive nature of the stock market’s effect on venture capital investing, the 1974 stock market decline hit the venture capital firms hard. A similar result came from the rise and fall of the dot.com industry in the 1990’s and the NASDAQ’s poor showing in the early 2000’s.
Today, things seem to be a bit clearer for the venture capital movement as more venture capitalists are willing to invest in these high-risk companies once again. They are also branching out beyond just the technology sector. With alternative fuel and energy sources getting a lot of press and becoming an increasingly popular way of life for many people and organizations, a venture capitalist no longer has to stick with those businesses that only deal in advance technology. And while the jury may still be out for a while on whether alternative fuel and energy becomes the same success story as Digital Equipment Corporation was, there will always be a venture capitalist willing to take the risk.