USA is the  birth place of Venture Capital Industry as we know it today. In this section we explore the historical development of the VC Industry in the USA.

Early Beginnings – 1940s and 1950s

During most its historical evolution in the United States, the market for arranging such financing was fairly informal, relying primarily on the resources of wealthy families.

During the early 1930s and 1940s there was great concern for the inadequate growth of new business formation and unavailability of long term capital for new ventures. In 1946,  American Research and Development Corporation (ARD), a publicly traded, closed-end investment company, was formed to address these concerns.

The company initially raised only $3.5 million of the $5 million it hoped to raise in 1946. It needed to raise additional funds in 1949 because its initial investments depleted its capital before its portfolio companies started to generate profits. ARD's best known investment was the start-up financing it provided in 1958 for computer maker Digital Equipment Corp. ARD was eventually profitable, providing its original investors with a 15.8 percent annual rate of return over its twenty-five years as an independent firm.

It was also highly successful in providing firms with managerial assistance, as indicated by the small number of its investments that lost money. However, because the company was regarded as, at best, a modest success over its early life, there was no effort to imitate it.

The number of such specialized investment firms, eventually to be called venture capital firms, began to boom in the late 1950s.The growth was aided in large part by the creation in 1958 of the federal Small Business Investment Company program. SBICs are federally licensed venture capital firms that can borrow money with a government guarantee of repayment. That guarantee allows SBICs to raise money inexpensively. They must then invest the money in entrepreneurial companies. Hundreds of SBICs were formed in the 1960s, and many remain in operation today.

Slow Growth in 1960s & early 1970s, and the First Boom Year in 1978

During the 1960s and 1970s, venture capital firms focused their investment activity primarily on starting and expanding companies. More often than not, these companies were exploiting breakthroughs in electronic, medical or data-processing technology.  Early successes include, for example, Intel Corp., Apple Computer Corp., Lotus Development Corp. and Federal Express Corp. As a result, venture capital came to be almost synonymous with technology finance.

Venture capital firms suffered a temporary downturn in 1974, when the stock market crashed and investors were naturally wary of this new kind of investment fund. In 1975, only one venture capital fund raised money, but that was the same year Tandem took $1 million from a venture capital firm. Returns were tremendous for the few firms in the business in the late 1970s. The federal government lent a helping hand in the form of legislation through this period. For instance, in 1978, capital gains taxes were reduced, so anyone making profits from investing in venture capital firms, or any venture capital firm making profits from investing in private companies, had to pay less taxes. That was the first big year for venture capital. The industry raised approximately $750 million in 1978.

Highs & Lows of the 1980s

In 1980, legislation made it possible for pension funds to invest in alternative assets classes such as venture capital firms. Pension funds represented billions of dollars in capital, so an allocation of even 1 percent of funds represented an enormous pool of money to venture capitalists. 1983 was the boom year - the stock market went through the roof and there were over 100 initial public offerings for the first time in U.S. history. That year was also the year that many of today's largest and most prominent firms were founded.

Due to the excess of IPOs and the inexperience of many venture capital fund managers, VC returns were very low through the 1980s. In 1991, disbursements from the venture capital firms to their investors hit a 10-year low. VC firms retrenched, working hard to make their portfolio companies successful. The work paid off and returns began climbing back up.

Boom Times in the 1990s

The 1990s have been, by far the best years for the Venture Capital Industry. The engine for growth has been the favourable economic climate in the US coupled with the advent of the Internet boom. During this decade, the interest rates were low and the P/Es were very high compared to historical averages. Pension funds grew dramatically. In 1987, U.S. pension funds held approximately $2.5 trillion. By 1997, that number reached $7 trillion. The booming economy made pension fund managers more comfortable allocating up to 4 percent of their capital into alternative assets. The U.S. stock market had its greatest run- up in history between 1990 and 1997. Mutual fund assets grew from $1 trillion in 1990 to $5 trillion in 1997. Finally, the rate of M&A activity has increased dramatically in the 1990s, creating more opportunities for small, venture-backed companies to exit (cash out) at high prices.

The advent of the Internet as a new medium for both personal and business communications and commerce created an avalanche of opportunities for venture capitalists in the mid and late 1990s. As a result, the industry has experienced extraordinary growth in the past few years, both in the number of firms, and in the amount of capital they have raised. In 1999, for example, 186 venture firms raised $35.6 billion for new investments. That was a substantial increase from the 161 that raised $19.0 billion the year before. Individual and institutional investors have flocked to venture capital funds as returns have skyrocketed beyond those available in other asset classes. Venture capital firms taking their portfolio companies public in the fevered markets of the late 1990s have made very high returns, averaging 35 percent per year. Some top investments have been producing results of 100 percent compounded annual growth through this period.

Today, an estimated 1000 venture capital firms in the United States raise outside capital from individual and institutional investors to finance their activities. Most are quite specialized, often investing in a single field, such as telecommunications or health care, and often only in one section of the country, such as the San Francisco Bay area, or Texas.