IVCA Feature: Anticipating the Spring Event Topic, ‘PE & VC Returns Since 2010,‘ an Abridged History of the Origins for PE & VC

IVCA Feature: Anticipating the Spring Event Topic, ‘PE & VC Returns Since 2010,‘ an Abridged History of the Origins for PE & VC

April 28, 2021

The IVCA is one week away from the Spring Event, with the keynote speaker Dr. Steven N. Kaplan on the topic “PE & VC Returns since 2010 … and Outlook for the Future” (registration link after the article). In anticipation of this overview, it is a good time to go over the origins of Private Equity and Venture Capital, on the timeline from the mid 20th Century to the turn of the 21st Century. Where we have been always anticipates where we might go.
 
1948 Beginnings
 
Although the concept of acquisitions and making minority investments had been around since the dawn of the industrial revolution, the origins of modern Venture Capital and Private Equity emerged after World War II with the founding of the first two Venture Capital firms in 1946 … the American Research and Development Corporation and the J.H. Whitney and Company (John Hay Whitney and partner Benno Schmidt).
 
1958 Legislative Breakthrough
 
One of the first steps toward a professionally managed VC/PE industry was the passage of the Small Business Investment Act of 1958, which allowed the U.S. Small Business Administration (SBA) to license “Small Business Investment Companies” (SBIC) to help the financing and management of small entrepreneurial businesses in the United States.
 
1960s-1980s Growth in Silicon Valley, Divergence in VC and PE industries
 
The first Venture Capital backed start-up with Fairchild Semiconductor in 1959, funded through what would later become Venrock Associates (founded by John D. Rockefeller’s fourth son Laurence).
 
In the 1960s, the common form of the Private Equity Fund emerged, organizing limited partnerships to hold investments in which investment professionals served as general partners, with passive limited partners putting up the capital. The compensation structure was also established, and although it continues to evolve, that structure is still in use today.
 
Venture Capital would get its reputation for being tech oriented …  not just from the Venrock backing above, but with VC-oriented firms in Silicon Valley in the early 1970s, including Kleiner Perkins and Sequoia Capital.
 
In 1973, the NVCA (National Venture Capital Association) was formed, based in Washington DC, the first industry trade group for Venture Capital.
 
In the Midwest during the 1970s, Stanley C. Golder built the Private Equity firm First Chicago Corp – which backed Federal Express – and served as NVCA chairman and the National Association of SBIC. During those tenures he made legislative inroads, including the allowance of pensions to invest in private equity. He would also go on to co-found the PE firm Golder Thoma & Cressey (later known at GTCR).
 
After a decade of developing buyout strategies began from several financiers and investment banks, the first PE firms were developed, which specifically includes the emergence of Thomas H. Lee Partners in 1974, that focused on leveraged buyouts (LBOs) of mature companies.
 
After a mid 1970s downturn, Venture Capital had its first major fundraising year in 1978, as the industry raised approximately $750M.
 
In the 1980s, VC firms expanded from a few dozen firms in the beginning of the decade to over 650 by the end of the decade, with capital managed going from $3B to $31B.
 
The origins of the LBO boom began with what was to become the Wesray Capital Corporation, when they acquired Gibson Greetings (a greeting card company )in 1982. They turned an initial $80M buyout into a $290M IPO sixteen months after acquisition. This started an LBO boom to the end of the 1980s that estimated 2,000 LBOs valued in excess of $250B.
 
1990s VC Boom and Bubble Bust, PE Buyouts Affect the Marketplace
 
After limited growth from the 1980s to the mid-1990s, Venture Capital took full advantage in the birth of the world wide web as nascent companies such as Netscape, Amazon and Yahoo were all funded by Venture Capital, with IPOs yielding enormous returns for the early VC internet investors. The number of VC funds increased from 40 in 1991 to 400 in 2000, with funds committed rising from $1.5B to more than $90B during that time. The bubble burst in 2000, causing many VC firms to fail.
 
The 1980s LBO boom led to terms like “corporate raiders” and “hostile takeovers” culminating in the “Barbarians at the Gate,” the $31.1B takeover of RJR Nabisco in 1989. In the 1990s, that boom led to a bust as several large buyouts went bankrupt and companies began to use strategies to protect themselves from LBOs.
 
However another boom emerged in the mid-1990s through the end of the decade as the PE industry relied on brand named firms managing multi-billion dollar funds, growing from $20.8B in 1992 to $305.7B by 2000, due to a readjusted strategy of long term development and using less leverage in acquisition. But the internet bust would have an effect on PE until the early part of the 2000s.
 
2000s Recovery
 
Private Equity was also reeling after the bubble bust, especially with investments in telecommunications companies. But after the dust settled PE began its third wave of boom (often called the “Golden Age”) with the completion of 13 of the 15 largest leveraged buyout transactions in history from 2003 through 2007, leading to unprecedented levels of investment activity and investor commitments, and a major expansion and maturation of the leading PE firms.
 
A new wave of technology in the 2000s was the salve for Venture Capital after the dot-com bubble burst, as the heretofore failed investments led to (for example) social media development – mostly VC backed – which ushered in new funding and returns for unicorn start ups. Besides reshaping the culture, this new era opened up possibilities for investments that went beyond the 1990s dot-com strategy of “following the money,” leading to life-changing tech that has reshaped the future.
 
For an update on this continuing story and a panel discussion (virtual and online), there is still time to register for the 2021 IVCA Spring Event, “PE & VC Returns since 2010 … and Outlook for the Future,” click here.