The Venture Capital Playbook: A Guide for Startups and Their Supporters (Part I)

Introduction

We have all likely heard about Venture Capital and have some general idea of how it works. But there are plenty of myths, misconceptions, and misleadings about how it actually works. Also, like anything else, Venture Capital has evolved and changed over time. Which is why we are writing this now to share (our perspective of) the current state of Venture Capital and provide some clarity on many of the aspects that often cause confusion or argument.

This will be a three-part blog, here is a quick breakdown of the areas we will touch on today:

1. What is Venture Capital?
   🚀 Explained in basic terms
   🎉 Origins and history of Venture Capital
   🌱 Role of Venture Capital in Startup Ecosystems

✅ What is Venture Capital?

Explained in basic terms

🚀 Venture capital is a type of investment that provides funding, expertise, and mentorship to early-stage startups in exchange for equity. Venture capital is typically characterized by…

• High Risk / High Return: Venture capital is a riskier investment than other types of funding, such as bank loans or government grants. This is because there is no guarantee that the startup will be successful. For that reason VC firms typically only invest in startups with a high potential for growth.
• Illiquidity: Venture capital investments are illiquid, meaning that they cannot be easily converted to cash. This is because startups are typically not yet profitable, so there is no market for their shares. VC firms typically hold their investments for several years until the startup is acquired or goes public.
• Equity investment: Venture capital firms invest in startups by buying equity, or shares, in the company. This means that the VC firm becomes a partial owner of the startup. The amount of equity that a VC firm invests will depend on the size of the investment and the stage of the startup.
• Active investor: VC firms are typically active investors, meaning that they take an active role in the management of the startups they invest in. VC firms will provide startups with advice and guidance, and they may also help to recruit new talent or open new markets.

✅ Origins and history of Venture Capital

🎉 While there have been articles and publications written to suggest that VC origins can be linked to the whaling industry in mid 19th century Massachusetts, our modern view of Venture Capital starts in the mid 1900s:

Early days (1946–1960): The first modern venture capital firm, American Research and Development Corporation (ARDC), was founded in 1946 by Georges Doriot in Massachusetts. ARDC invested in early-stage technology companies, such as Digital Equipment Corporation and Control Data Corporation.

• 1946: American Research and Development Corporation (ARDC) is founded by Georges Doriot, a Harvard Business School professor. ARDC is considered to be the first modern venture capital firm. Georges F. Doriot, the father of venture capital
• 1958: The Small Business Investment Act of 1958 was passed by Congress to provide funding for SBICs (Small Business Investment Companies), which are private investment firms that provide capital to small businesses.

Growth (1960–1980): The venture capital industry grew rapidly in the 1960s and 1970s, as more and more venture capital firms were founded. The industry also began to focus on new sectors, such as healthcare and clean energy.

• VC world begins to move from the northeast to Silicon Valley during the 70s.
• Many of the most prominent firms still around today were started during this time such as Sequoia Capital, Greylock Partners, Kleiner Perkins Caufield & Byers, Bessemer Venture Partners, and Accel Partners to name a few.
• Technology companies like Intel, Apple, Microsoft, Cisco Systems, Oracle, and Genentech amongst many others emerge during this period as well.

Dot-com bubble (1990–2000): The venture capital industry experienced a boom in the 1990s, as investors poured money into dot-com startups. Many of these startups failed, however, and the venture capital industry experienced a bust in 2000, leading to a number of VC firms going out of business.

Recovery (2000-present): The venture capital industry has recovered from the dot-com bust and is now thriving. Venture capital firms are investing in a wide range of sectors, including technology, healthcare, and clean energy.

For a more detailed history check out: Venture Forward’s VC History

✅ Role of Venture Capital in Startup Ecosystems

🌱 Venture capital plays a crucial role in driving innovation and economic growth by identifying and investing in talented entrepreneurs. VC firms serve as the financial backbone of most ecosystems.

To fully understand the role Venture Capital plays in startup ecosystems, it can be helpful to first take a step back to understand the ecosystem as a whole.

But first, if you aren’t familiar with the term, a startup ecosystem is a geographic area with a high concentration of startups, venture capital firms, and other organizations that support the growth of startups. Here are some of the common main components contributing to an ecosystem:

• Startups
• Venture Capital Firms
• Accelerators and Incubators
• Coworking spaces
• Government agencies
• Universities

As you might imagine, within each of these there can be numerous different players. For example, let’s take a look at this graphic made for Singapore’s Startup Ecosystem:

As Peter Fisk states in his article about the importance of startup ecosystems, “The best ideas and the best talent are useless without the capital to fund their vision.” Which is why VC firms are such a crucial component to a thriving ecosystem.

To put this into perspective; Silicon Valley’s ecosystem — which has the highest ranked ecosystem in terms of funding capabilities — accounted for 31% ($1.24 Trillion) of the total value of the top 30 ecosystems globally ($4 Trillion). — Startup Genome

Not only is it important to have the presence of VC firms within the ecosystem. But as we can see in the Singapore ecosystem above, there are often VC firms for each of the various funding stages (more on those later). A strong ecosystem usually needs this if they want the startups to have the resources to grow locally.

Additionally, many Venture Capital firms have now evolved to a point where most focus on specific industries, sectors, and even founder types. More on this breakdown when we talk about how Venture Capital works in the next section.

If you want to learn more about Startup Ecosystems, check out Startup Genome and their extensive Ecosystem Reports.

👋 As we conclude the first part of our three-part blog series, we’ve laid the groundwork by exploring the fundamental concepts that underpin the topic at hand. In the next installment, we will cover these topics below:
How does Venture Capital actually work?
a. Key Terms you should know
b. The Startup Funding Lifecycle
c. Investor vs. Founder Perspectives

Remember that knowledge is a journey, and we’re excited to continue this journey with you.