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Chapter 10. Venture Capital Funds > The Development of the Venture Capital Indu...

The Development of the Venture Capital Industry in the United States

Beginnings

The venture capital industry has developed in the United States over the last few decades, and U.S. funds now manage more than $100 billion. While private and corporate investors have financed ventures in the United States for many years, the first U.S. venture capital fund (ARD—American Research and Development) was founded only in 1946 after World War II by Professor Carl Comton, President of the celebrated Massachusetts Institute of Technology (MIT) and Professor Doriot of Harvard University. With the help of several local financiers, ARD started financing ventures which were based, among other things, on inventions developed for the U.S. Army during the Second World War, particularly developments made at MIT. The investments of this venture capital fund fit what had subsequently become the norm among venture capital funds: a small portion of the investment portfolio yielded the lion's share of the fund's return during its lifetime. The fund's investment in Digital, for instance, in the amount of $70,000, yielded approximately one half of the fund's return (the value of the investment rose to more than $350 million).

When the fund was first founded, institutional investors shied away from it, and it was traded on the stock exchange as a closed-end mutual fund. Its main shareholders were private investors. More venture capital funds were founded in the 1950s, but they too raised money mainly from the public, and were traded as closed mutual funds. The first known fund which was organized as a limited partnership for venture capital investments, was the Draper, Gaither and Anderson fund, which was established only in 1958, and signaled the beginning of a phenomenon which became more prevalent in the 1960s and 1970s. Nevertheless, most of the funds in these decades were still closed mutual funds traded on the stock exchange, or small business investment companies which received loans guaranteed by the U.S. government to encourage investments in small businesses.


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