VC: An American History (2019) by Tom Nicholas

The United States is, beyond doubt, the most innovative economy in the world and has been for decades, if not centuries. There is no simple explanation or formula for this remarkable and enduring success, but I’m convinced that America’s uniquely large and risk-embracing venture capital ecosystem has played an important role. In VC: An American History (2019), Harvard Business School professor Tom Nicholas provides a scholarly history of American venture capital in its many forms, tracing its evolution from the founding of the republic to the modern venture industry.

The allure of “long-tail investing” is a theme that runs throughout the book: making a large number of high-risk investments with the expectation that one or two spectacular successes will more than compensate for all the failures and modest returns. Perhaps the greatest surprise of the book is just how unremarkable the overall returns from venture capital have often been. Across different periods, structures, and industries, venture investing has frequently produced fairly pedestrian internal rates of return (IRRs) when compared with public-market equivalents, such as an S&P 500 index fund. Indeed, over time, and after accounting for management fees and carried interest, many venture funds have underperformed the broader market. In a revealing twist that Nicholas does relatively little to emphasize, venture capital is itself a long-tail industry. Just as a handful of extraordinary portfolio companies can drive the returns of an entire fund, a relatively small number of elite firms and superstar funds can make the asset class as a whole appear exceptionally attractive to enormous pension funds, university endowments, and insurance companies searching for higher returns on their multibillion-dollar pools of capital.

Nicholas’s broad narrative approach leads him to develop several core themes. First, outsized returns from venture investing have proven surprisingly “sporadic and infrequent,” with a relatively small number of firms, operating during particular periods, generating the truly blockbuster returns. Second, for an industry dedicated to radical ideas and disruptive change, venture capital itself has proven remarkably conservative, exhibiting relatively little meaningful innovation in its basic structure and surprisingly little evidence of improvement in its ability to select winners. Third, venture capital has flourished in the United States in large part because of the country’s unusually risk-tolerant entrepreneurial culture. Finally, its success has also depended heavily on a supportive federal government. Legislative and tax changes, along with policies encouraging high-skilled immigration and university research, favorable treatment of long-term capital gains, and rules allowing pension funds to invest in higher-risk assets, helped create the conditions in which venture capital could flourish. Without this broader institutional and policy framework, Nicholas suggests, the American venture industry almost certainly would not have developed to the extent that it has.

VC is divided into four roughly equal sections, each examining a different period in American history and the role that venture investing played within it. The first covers the early nineteenth century through the outbreak of the Second World War. Its most fascinating case study is the whaling industry, a gruesome but highly profitable business that the United States dominated for much of the nineteenth century. By 1850, roughly 75 percent of the world’s 900 whaling vessels were American, with the vast majority sailing from a handful of Atlantic ports, most notably Nantucket and New Bedford, Massachusetts. The industry generated about $11 million a year, roughly $300 million in modern dollars and equivalent to about half the capital value of the entire whaling fleet, a remarkably attractive return on capital. Voyages lasted over three years on average, and their returns varied enormously. Nicholas shows that the distribution of profits from whaling voyages bears an almost eerie resemblance to the returns of modern venture funds. Roughly a third of voyages financed by pools of limited-partner capital failed to generate any return at all, a dreaded outcome known as a “broken voyage” that could destroy a captain’s reputation and career. Although about two-thirds of voyages produced some profit, fewer than 2 percent returned more than 100 percent. It was these rare, outsized long-tail returns that kept investors willing to finance such a speculative enterprise. The risks were physical as well as financial; on any given voyage, a whaling ship faced more than a 5 percent chance of being lost at sea. Over the course of the nineteenth century, New Bedford, the world’s largest whaling port, ultimately lost more than a third of its fleet – 272 of its 787 whaling ships.

Whaling voyages were not only dangerous; they were also extraordinarily expensive. The average expedition cost between $20,000 and $30,000 to outfit and supply, more than ten times the price of an average farm at the time. Indeed, whaling was then the largest industry in the United States in terms of invested capital from much of the early and mid-nineteenth century. The combination of enormous upfront costs and considerable risk made conventional bank financing virtually impossible. Instead, whaling ventures depended on pools of risk capital supplied by wealthy doctors, lawyers, merchants, and other private investors willing to finance highly speculative enterprises in exchange for the possibility of extraordinary returns.

Remarkably, the economic structure used to finance the whaling industry closely resembles that of the modern venture capital industry. Highly experienced and well-connected whaling agents acted as intermediaries between wealthy individuals seeking to invest their capital and whaling ships seeking financing for their expeditions. These agents typically earned a 2.5 percent fee on the capital raised and a 15 percent commission on the value of product sold, after insurance (usually about 10 percent of the expedition’s cost) and other expenses had been paid. It was, in effect, the same “two and twenty” arrangement associated today with leading Sand Hill Road venture firms. Like many modern venture capitalists, top whaling agents often invested their own money in whaling voyages in order to earn performance-based equity and to demonstrate that their interests were aligned with the limited partners and crew of the ship. 

Even the crews performing the arduous and dangerous work were given something resembling nineteenth-century stock options, receiving shares worth one, three, or six percent of the net proceeds from a successful voyage, while ship captains with a strong record of success could earn as much as 12 percent. And the parallels extended beyond financing. Whaling logbooks, which contained valuable knowledge about productive hunting grounds and successful voyages, were closely guarded intellectual property, the nineteenth-century equivalent of the proprietary source code or design schematics of modern software and semiconductor companies.

As a group, whaling agents also performed much like modern American venture capital firms. Throughout the nineteenth century, 29 whaling agencies in New Bedford financed 1,566 voyages, helping make the city what the New York Times described in 1853 as “probably the wealthiest place in America.” The most successful firm, Gideon Allen & Son, generated a mean profit rate of nearly 60 percent – almost twice that of its nearest competitor – making it something like the Kleiner Perkins or Sequoia of the whaling industry. Yet the performance of the industry as a whole was far less impressive, with a mean profit rate of less than 5 percent. By comparison, stocks listed on the New York Stock Exchange returned nearly 8 percent annually between 1830 and 1887. The pattern closely resembles modern venture capital: a small number of exceptional firms generated spectacular returns, while the industry overall struggled to outperform readily available public-market alternatives.

Finally, the similarities between whaling and modern technology startups extend to the cyclical nature of the business, the extreme volatility of returns, and its susceptibility to outside events. Whaling investors were also prone to the same kind of herd behavior that characterizes modern venture capital. When particularly lucrative hunting grounds emerged, large numbers of American whaling vessels converged on the same waters in pursuit of outsized returns. Modern venture capitalists exhibit a similar “herd-inducing cognitive bias,” as FOMO propels investors to pour capital into clusters of highly similar and often directly competing startups. Whether chasing whales in the nineteenth century or the latest technological breakthrough today, the prospect of a spectacular payoff has a remarkable tendency to send investors rushing in the same direction.

In sum, whaling combined a long-tail distribution of returns, a specialized agent-centered organizational structure, and a mutually reinforcing set of financial incentives linking investors, agents, and crews, making it a remarkable historical analogue to the twenty-first-century venture capital industry. As Nicholas writes, “no industry gets quite as close as whaling does to matching the organization and distribution of returns associated with the VC sector.”

Next, Nichols turns the clock back almost a century to 1789 to tell the story of Samuel Slater, a twenty-one-year-old English immigrant to America with extensive experience operating the water-frame technology developed by Richard Arkwright and patented in 1769. Slater’s arrival, Nichols argues, represented “a pivotal, if unexpected, moment in American history,” with consequences that would prove “monumental for American capitalism.” Arkwright’s machine used rollers to draw out cotton fibers and produce thread far stronger than that made by the spinning jenny. Moreover, unlike the jenny, the water frame was driven by an external power source, initially water wheels and horses, and eventually steam engines. The technology was fabulously successful. By the time Arkwright died in 1792, his fortune was equivalent to roughly $75 million today. The British rigorously guarded the technology, even prohibiting skilled textile workers from leaving the country. In 1789, the Providence, Rhode Island firm of Brown & Almy acquired a crude version of the water frame but could not get it to work properly. Slater claimed that he could make the technology operational and, within months, proved true to his word. Nichols characterizes the financial arrangement Brown & Almy struck with Slater as an early form of venture capital that included a variety of time-bound toll gates to trigger additional investment. The results were transformative: by 1812, Rhode Island had 33 textile factories with a combined capacity of 56,000 water-powered spindles. Slater himself prospered enormously, dying in 1835 with a fortune equivalent to roughly $37 million today. Nicholas’s main point is to emphasize that mechanisms for the provision of startup finance existed in America from very early on in its history.

Another early proto-venture capitalist was the Pittsburgh-based financier Andrew Mellon, who tied his personal investments in business enterprises to governance and board representation. Nichols argues that Mellon’s approach was distinctive for its time in four important respects. First, his investments combined debt and equity, giving him a stake in the long-term upside of the companies he backed. Second, he created a financial intermediary, the Union Trust Company, which by 1903 had pooled capital of $37 million (roughly $1 billion today) and functioned as a “sort of venture capital firm.” Third, Mellon placed great emphasis on backing highly capable founders and surrounding them with competent professional managers. Fourth, he was sensitive to the importance of ownership structure, flexibly taking both majority and minority equity positions depending on the circumstances. His stakes therefore varied widely among his most successful investments, including Gulf Oil (83 percent), Alcoa (40 percent), Westinghouse Air Brake (20 percent), and Pullman-Standard (10 percent). Nichols writes that Mellon’s approach was “consistently VC-like in its application.” By the time Mellon left the Hoover administration as secretary of the treasury in 1931, his fortune was equivalent to roughly $30 billion today.

By the late 1920s, the top 1 percent of Americans earned 25 percent of national income and controlled more than 50 percent of national wealth. Some of this surplus capital found its way into the hands of talented but cash-poor entrepreneurs. Indeed, several of the most iconic American companies of the late nineteenth and early twentieth centuries owed their beginnings to startup capital provided by wealthy angel investors, including Eastman Kodak in Rochester, New York; Ford Motor Company in Detroit; and Federal Telegraph Company and Philo Farnsworth, the “forgotten father of television,” in San Francisco. Constrained by their own limited financial resources, these entrepreneurs invested little or none of their personal capital in their ventures. For more than a century, this proto-American venture capital system operated primarily through informal networks of wealthy individuals willing to back promising entrepreneurs.

Over time, a multilayered system of entrepreneurial finance began to emerge, much of it tracing its roots to the family offices of America’s wealthiest families and individuals. These included the Rockefeller family’s investment operation, which eventually became Venrock; the investment activities of Henry Phipps and his descendants, which evolved into Bessemer Venture Partners; and J.H. Whitney & Company. In the years following the Second World War, these organizations developed investment practices now closely associated with modern venture capital, including rigorous deal due diligence, active governance of portfolio companies, and the deliberate pursuit of long-tail returns. Laurence Rockefeller, grandson of oil magnate John D. Rockefeller and an avid enthusiast of science and technology, might reasonably claim the title of America’s first true venture capitalist. His stated investment philosophy was explicitly venture-oriented: “We are undertaking pioneering projects that with proper backing will encourage sound scientific and economic progress in new fields – fields that hold the promise of tremendous future development.” 

Laurence’s approach to investing was methodical and objective, emphasizing large and emerging markets, companies displaying early but tangible signs of traction, and capable management teams. Thus, “in practice,” Nicholas writes, “Laurence came close to defining modern VC,” with one important distinction: his primary objective was not financial return, but rather contributing to society and advancing American science and technology. Between 1938 and 1969, Laurence made 59 investments totaling just $21 million (roughly $180 million in today’s dollars) but his portfolio ultimately failed to generate VC-style returns. Nearly half of his investments produced negative returns, while only 7 percent returned more than ten times invested capital; too few outsized winners to compensate fully for the losses elsewhere in the portfolio. Overall, the portfolio achieved a public market equivalent (PME) of 0.86, meaning it returned roughly 14 percent less than an equivalent investment in publicly traded securities over the same period. This failure to capture the outsized gains associated with long-tail returns would plague early venture capitalists for much of the twentieth century. Nicholas does not explore whether Laurence’s disappointing performance resulted primarily from poor investment selection or from a more fundamental feature of the period: an American economy that may simply have produced fewer of the extraordinary, isolated winners on which modern venture capital returns depend. During the decades after the Second World War only about a dozen venture-style investment firms existed in America, growing to 225 by 1979.

Nicholas also considers J.H. Whitney & Company, founded in 1946, to have been “pivotal in the history of venture capital.” Like Laurence Rockefeller, John Hay Whitney inherited his wealth, but he built a professional investment organization around it, assembling a team of roughly a dozen experts drawn from a variety of fields. The firm conducted rigorous due diligence and typically invested between $500,000 and $1 million (equivalent to roughly $5 million to $10 million today) with the goal of generating returns of three to five times invested capital over five to ten years. Between 1946 and 1958, the firm reviewed more than 7,000 proposals but invested in just 50, an indication of its highly selective approach. Yet, as with Laurence Rockefeller’s portfolio, the promise of long-tail returns proved “alluring but hard to operationalize in practice,” Nicholas writes. Overall, the portfolio generated an annualized return of less than 2 percent, while even its most successful investments produced annualized returns of barely more than 10 percent. Indeed, none of the roughly dozen venture-like investment companies founded between 1946 and 1951 achieved performance comparable to what would later be expected of modern venture capital.

Nicholas notes that the period following the Second World War marked an important inflection point in the evolution of the American venture capital industry. The long-tail investment model would remain largely unproven for decades, and the decisive shift toward the limited partnership structure was still in its infancy, but several important developments helped lay the groundwork for the industry’s future growth.

In 1946, the American Research and Development Corporation (ARD) was founded in Boston to channel institutional capital into venture investments intended to promote regional economic development. ARD’s stated remit was “to find men and find ideas.” Georges Doriot, an affluent French émigré, Harvard Business School professor, and, according to Nicholas, an unrepentant misogynist and bigot, played a pivotal role in ARD’s creation and would later be called “the father of U.S. venture capital.” Among ARD’s most important innovations was its ability to tap the vast pools of capital held by trusts and insurance companies. This combination of institutional funding and a systematic approach to intermediating venture finance represented a significant departure from the wealthy family-office model that had dominated entrepreneurial investing for the previous half century. However, American tax rules still worked against their model. For instance, if ARD acquired equity in a company exceeding ten percent of the voting stock, it would lose its entitlement to tax treatment as a conduit and would be “double-taxed” on distributions. Federal tax policies such as this worked against the growth of venture capital investing for the first two-thirds of the twentieth century.

ARD’s organizational structure, however, differed significantly from that of modern venture capital firms. It was organized as a closed-end fund under the Investment Company Act of 1940, giving it a permanent pool of capital rather than the fixed-life funds conventional in venture capital today. In practical terms, ARD’s capital had no predetermined expiration date: the firm could invest in companies, hold those investments for as long as it wished, sell them, and reinvest the proceeds. Investors seeking liquidity generally sold their shares in ARD rather than waiting for the fund to wind down and return their capital. 

Between 1946 and 1950, ARD reviewed nearly 2,000 proposals but invested in just 26 companies, including Tracerlab, a manufacturer of radiation-measurement equipment; High Voltage Engineering, a maker of particle accelerators; and Ionics, a leader in water-purification technology. Three-quarters of these investments were located on the East Coast, with most concentrated in Massachusetts. Between 1946 and 1973, ARD would ultimately invest in 120 companies, primarily through convertible debt and convertible preferred stock.

Yet, like the family-office efforts that preceded it, ARD initially failed to generate VC-style returns despite its sophisticated approach to investment selection, governance, and financing. Between 1946 and 1956, ARD invested roughly $10 million (more than $90 million in today’s dollars) and generated an annualized return of just 5.2 percent. Over the same period, the S&P returned 8.9 percent annually on price appreciation alone and 15.2 percent with dividends reinvested. Once again, the promise of long-tail returns from entrepreneurial investing failed to materialize, leaving venture investments substantially underperforming publicly traded equities.

Despite this otherwise lackluster performance, ARD’s 1957 investment in Digital Equipment Corporation (DEC), the first manufacturer of a mass-produced minicomputer, would provide the first major demonstration of the extraordinary returns that could be generated by backing a risky, early-stage technology company. In exchange for an investment of just $70,000 (roughly $600,000 today) ARD received an astonishing 78 percent ownership stake in DEC. By the end of 1971, ARD’s stake was worth an extraordinary $355 million in unrealized gains (nearly $3 billion in today’s dollars) and DEC had become the largest employer in Massachusetts.

“DEC was the epitome of a long-tail portfolio investment,” Nicholas writes, and its success transformed ARD’s overall performance. From 1946 to 1971, the fund generated a compound annual growth rate of nearly 16 percent, compared with roughly 7 percent for the S&P Composite, or more than 11 percent with dividends included. Crucially, however, virtually all of ARD’s outperformance depended on this single extraordinary investment. Without DEC, ARD’s portfolio would have underperformed the S&P, providing a striking early demonstration of the power-law dynamics that would eventually become fundamental to the economics of modern venture capital. However, the DEC deal also exposed a fundamental flaw in ARD’s management and incentive structure: the lead investor responsible for the investment personally earned just $2,000 from its extraordinary success.

Another critical turning point, Nicholas argues, was the creation of the Small Business Investment Company (SBIC) program in 1958, whose origins could be traced to the banking crisis of the Great Depression and the establishment of the Reconstruction Finance Corporation in 1932. Administered by the Small Business Administration, the program allowed specially licensed investment companies to finance small businesses using not only private capital but also funds borrowed from the federal government on favorable terms, while benefiting from certain tax advantages. The broader tax environment made such incentives particularly significant: before the Second World War, the top federal income tax rate had reached a staggering 79 percent, while the capital gains rate climbed as high as 39 percent. By the 1960s, more than 700 SBICs were operating across the country. Nicholas emphasizes that these and other government initiatives during the 1950s and 1960s played an important role in stimulating investment and creating the institutional conditions from which a more market-driven venture capital industry could eventually emerge.

The SBIC program began operating in 1959 and peaked in 1964, with 722 organizations and a combined acceptance rate of roughly 90 percent. Nicholas argues, however, that relatively few SBICs actually invested in high-risk entrepreneurial ventures. Instead, the program became plagued by fraud and malpractice, with many participants steering privileged government loans to borrowers who were ineligible under its rules. There were, nevertheless, notable successes. Despite these shortcomings, Nicholas argues that the SBIC program played an important role in the development of American venture capital. Intel, for example, received a $300,000 investment from the SBIC arm of Wells Fargo in 1969, just a year after the company was founded. The program also provided an entry point for several talented venture investors who would go on to establish successful firms, including William Draper II, who co-founded Sutter Hill Ventures in Palo Alto. Perhaps most importantly, the SBIC program helped establish the legal and institutional foundations upon which modern venture capital could develop. As Nicholas writes, “Regulatory boundaries were shifted and exemptions were made, helping to create the environment in which the modern venture capital industry operates. . . . The SBIC program yielded deeper understanding of government policy and how the right kinds of legal and financial institutions could allow entrepreneurship and venture finance to flourish.”

One of the most important structural shifts in the evolution of venture capital was the widespread embrace of the limited partnership model. Compared with closed-end funds, limited partnerships offered several important advantages, including favorable tax treatment, powerful performance-based incentives for successful investors, and an emphasis on generating returns within a relatively short and defined time horizon, typically less than ten years. The legal structure itself was hardly new. Limited partnerships had been used since medieval times to finance high-risk Mediterranean trade and were later employed extensively in early twentieth-century oil and gas exploration, where they helped convert ordinary income from highly speculative exploration (with success rates of roughly 5 percent) into more favorably taxed long-term capital gains.

The model was adopted by Palo Alto’s Draper, Gaither & Anderson (DGA) in 1959, Boston’s Greylock Partners in 1965, and New York’s Venrock in 1969. Of the three, Nicholas argues that Venrock came closest to the modern limited-partnership venture capital fund, with its focus on early-stage technology companies, a relatively short six-year investment horizon, and a remarkable internal rate of return exceeding 25 percent, driven in part by the outsized gains from its early investment in Apple.

Beyond the critical structural innovation of the limited partnership itself, these firms embraced many of the investment practices that would come to define modern venture capital. Their investment decisions increasingly centered on the trinity of technology, people, and markets, while placing considerable emphasis on board representation, active governance, and close engagement with portfolio companies. They were also among the first venture firms to specialize according to the domain expertise of their general partners; Greylock, for example, concentrated on information processing, software, and telecommunications. Together, these developments marked the emergence of a venture capital model that would be readily recognizable today.

These firms were also some of the first to attract significant amounts of investment capital from major university endowments and pension funds. Under the Employee Retirement Income Security Act (ERISA) of 1974, pension fiduciaries were required to invest with the care and judgment that a prudent person familiar with such matters would exercise. The basic idea was straightforward: you cannot gamble recklessly with employees’ retirement savings. This became known as the “prudent man rule.” The problem for venture capital was how that standard was initially interpreted. Pension managers tended to assume that investing in speculative, illiquid startups – or even allocating money to venture-capital funds – might violate their fiduciary responsibilities. A pension fund could therefore invest heavily in conventional stocks and bonds but was much more reluctant to put money into venture capital. Since pension funds controlled enormous pools of money, this effectively kept a major source of institutional capital out of the young VC industry. The crucial change came in 1979, when the U.S. Department of Labor clarified ERISA’s prudent-man standard. The government effectively said that prudence should be judged at the level of the overall portfolio rather than by asking whether each individual investment was safe. A pension fund could therefore make some risky investments, including investments in venture-capital funds, provided those investments formed part of a sensibly diversified portfolio.

Thus, between the late 1950s and the late 1970s, three interrelated developments fundamentally altered the trajectory of venture investing in the United States: the widespread adoption of the limited partnership model, several spectacular investment successes that pushed portfolio returns well beyond those of public market equivalents, and access to deep new pools of institutional capital from pension funds and university endowments. Together, these changes transformed venture capital from a relatively informal and fragmented investment activity into an increasingly professionalized and institutionalized industry, setting the stage for its dramatic growth and exceptional performance during the 1980s.

Before exploring the full take-off of venture capital in the last decades of the twentieth century, Nicholas turns to the emergence of Silicon Valley as the epicenter of the industry. Silicon Valley largely took shape after the Second World War with the rise of semiconductor design and manufacturing centered initially around Shockley Semiconductor and encouraged by the innovative relationship between academic research and commercial development championed by Stanford engineering professor and later provost Fred Terman. Nicholas then profiles three legendary early venture capitalists, each representing a distinctive investment philosophy. Arthur Rock of Davis & Rock focused primarily on exceptional people with extraordinary potential, backing members of the “Traitorous Eight” who left Shockley to establish Fairchild Semiconductor, Robert Noyce and Gordon Moore when they subsequently left Fairchild to found Intel, and later Steve Jobs at Apple. Tom Perkins of Kleiner Perkins placed greater emphasis on technological innovation, backing companies built around major technical breakthroughs, including Genentech in genetic engineering and Tandem Computers in networked computing. Don Valentine of Sequoia Capital, by contrast, concentrated on identifying emerging markets with enormous growth potential, including electronic home entertainment with Atari and Electronic Arts, computer networking with Cisco Systems, and information management with Oracle.

By the 1980s, marquee venture firms such as Kleiner Perkins and Sequoia were generating internal rates of return exceeding 50 percent. By the 1990s, much larger pools of venture capital were producing extraordinary returns of 100 to 300 percent. After nearly a century of experimentation with entrepreneurial finance, the essential elements of the modern venture capital investment thesis – exceptional people, transformative technologies, and enormous emerging markets – had finally come together.

The final third of VC focuses on the period from the early 1980s through the dot-com boom of the late 1990s and early 2000s. It is the most detailed, but also the least interesting, section of the book. By the 1990s, hundreds of venture capital firms were deploying billions of dollars in early-stage risk capital, supported by an increasingly sophisticated ecosystem of prestigious professional-services firms. Law firms such as Wilson Sonsini specialized in the legal complexities of venture-backed companies, while small but influential investment banks such as Hambrecht & Quist and Robertson Stephens focused heavily on underwriting technology IPOs. Silicon Valley Bank, meanwhile, carved out a distinctive role providing debt financing to venture-backed startups.

At the same time, many of America’s largest and most influential corporations – including Exxon, General Electric, 3M, and Xerox – established their own in-house corporate venture operations. The venture industry itself became increasingly segmented and specialized, developing clearly defined stages of investment ranging from seed and Series A financing through later-stage growth capital. Perhaps reflecting the period in which the book was published in 2019, Nicholas also devotes considerable attention to venture capital’s “diversity problem,” particularly the persistent underrepresentation of women in senior investing roles at large venture firms.

In the concluding chapter, Nicholas turns to the dizzying heights and dramatic collapse of the dot-com bubble. The numbers are truly staggering. In 1995, venture capitalists made 1,864 investments totaling $7.2 billion. Just five years later, they made 7,794 investments totaling nearly $100 billion, an astounding compound annual growth rate of roughly 70 percent! A third of that capital was invested in Silicon Valley alone, as more than 1,000 venture firms competed intensely for access to promising deals. The median venture financing round had reached $10 million at a pre-money valuation exceeding $30 million.

By 2000, new commitments to U.S. venture capital funds reached $30 billion, while venture-backed companies generated nearly $100 billion in proceeds from M&A transactions and IPOs. Then the bubble burst. Within several years, new commitments to venture funds had fallen to barely $10 billion, while M&A and IPO activity involving venture-backed companies collapsed to just $11 billion. Over roughly the same period, the technology-heavy NASDAQ lost 77 percent of its value. “The dot-com era was the most turbulent period in the history of the venture capital industry,” Nicholas concludes with almost comical understatement.

One of the great ironies in the history of American venture capital is that an industry dedicated to identifying and financing disruptive technologies and transformative change has itself demonstrated remarkably little organizational innovation. The widespread adoption of the limited partnership model, pioneered by Draper, Gaither & Anderson in 1959, arguably represents the last fundamental change in the industry’s organizational structure. If anything, venture capital firms have benefited more from favorable changes in tax, regulatory, and pension policy than from innovations in their own business model. Indeed, Nicholas concludes that “government has had major impacts, both direct and indirect, on the various mechanisms and incentives that led to the rise of the venture capital industry in the United States.” The industry’s principal organizational response has instead been simply to get bigger. New Enterprise Associates (NEA), one of the early pioneers of institutional venture capital, began in 1978 with a $16.4 million fund. By 2017, it had closed a $3.3 billion fund, an increase in scale roughly fifty-five times greater than the rate of inflation over the same period.

In closing, Nicholas argues that the history of venture capital in the United States offers “a window into the larger history of America.” “It signifies a cultural appetite for risk-taking that celebrates entrepreneurship’s spirit of adventure, that accepts unbridled avarice, and that encourages the insatiable pursuit of material financial gain.” Venture capital, therefore, was “not an isolated, mid-twentieth century invention, but rather a continuation of a deep-seated tradition in the deployment of risk capital in the United States going back to early instances of entrepreneurship.” At the same time, Nicholas emphasizes that successful long-tail portfolios have always been extraordinarily difficult to generate and that the outsized returns of the late 1990s represented the exception rather than the rule, although, of course, the book was published before the AI boom of the mid-2020s.