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Venture Capital

Defining Events

Many important events—such as the founding of professional VC associations; new laws, such as the Jumpstart Our Business Startups Act of 2012; and the slow, but steady, emergence of women in venture capital—have shaped the VC industry.

The First Professional VC Associations

Although the first publicly owned venture capital firm (American Research and Development Corporation) was launched in 1946, the industry remained largely unorganized for more than 15 years. It had no professional association to represent its interests in Washington D.C. and state capitals, no organized public relations strategy, and no industry publication that served as a sounding board for the various VC firms that were scattered across the U.S. In 1962, that began to change when some of the industry’s original West Coast venture investors began meeting in San Francisco’s Olympic Club to network and make deals. The group met informally until 1969, when it became the first official nonprofit VC capital organization in the world—the Western Association of Venture Capitalists. Today, the association is comprised of more than 100 venture firms and more than 1,000 venture capitalists.

The Western Association of Venture Capitalists provided excellent representation to West Coast venture capitalists, but as the VC industry expanded and encountered growing pains (including regulatory challenges), there still was a need for a national organization that could represent the interests of VC firms throughout the country. That organization finally arrived in 1973, when the National Venture Capital Association (NVCA) was founded in the offices of the Heizer Corporation, a leading VC firm. According to a 1973 news story in SBIC/Venture Capital, the NVCA was founded “as a means for venture capital organizations throughout the country to work together on mutual interests and problems. Membership is by invitation and open only to venture capital groups, corporate managers, and individual venture capitalists that are responsible for investing private capital in young companies on a professional basis.” The NVCA began immediately lobbying members of Congress to change existing laws and create new laws that would make it easier for VC firms to conduct business. One of the NVCA’s signature victories occurred in 1978 when it convinced the federal government to change the pension plan rules under the Employee Retirement Income Security Act, making it possible for pension funds to invest in alternative (and potentially higher-risk) asset classes such as venture capital funds. This change generated a massive increase in the pool of money that was available to venture capitalists, and the industry flourished

The National Venture Capital Association remains the voice of the U.S. venture capital community. It is comprised of more than 330 venture capital firms and corporate venture groups that are actively investing in innovative, growth-oriented startup companies.

The Dodd-Frank Wall Street Reform and Consumer Protection Act and New Efforts to Deregulate the Industry

In response to financial scandals and the economic recession in the late-2000s, the federal government began to look more closely at the financial sector. As a result, regulation of the VC industry increased to some extent. The Dodd-Frank Wall Street Reform and Consumer Protection Act was passed in 2010. It required all hedge fund advisers and private equity managers with more than $150 million in assets under management to register with the Securities and Exchange Commission (SEC) and to hire a chief compliance officer to create and monitor a compliance program, among other rules. Although VC managers were not required to register, the law’s definition of a venture capital fund caused many entities that were primarily engaged in VC investing, but used other investment strategies, to be required to comply with the law. In 2011, the SEC revised the definition of a VC fund, which exempted many VC firms from having to register with the SEC and meet compliance requirements. To be exempt from the SEC requirement, VC firms must have at least 80 percent of their money invested in shares of private companies and as much as 20 percent of their funds in shorter-term investments.

Additionally, the Volcker Rule, a provision of Dodd-Frank, restricted banks from conducting certain investment activities with their own funds and prohibited them from investing in or sponsoring venture capital, private equity, and hedge funds in most cases.

In recent years, the Congress reversed some of the provisions of Dodd-Frank and reduced regulation of the alternative investment industry. The Economic Growth, Regulatory Relief and Consumer Protection Act of 2018 changed the financial threshold in which banks could be classified as “systematically important financial institutions” from those that had more than $50 billion in assets to those with $250 billion in assets. The Wall Street Journal reports that the number of banks facing tougher financial regulation will drop from 38 to 12. Additionally, the act also provides smaller banks with relief from the Volcker Rule. Banks with less than $10 billion in assets may now invest in or sponsor venture capital, private equity, or hedge funds and engage in proprietary trading.

The Jumpstart Our Business Startups Act of 2012 (commonly known as the JOBS Act) is one other noteworthy law. It allows VC and other alternative funds to advertise and perform general solicitations, with the ultimate goal of reaching a larger number of investors. After years of delay, the SEC approved Title IV of the law in 2015. This ruling allows entrepreneurs to begin raising money from average investors (i.e., the crowd, or those who do not meet high-wealth standards). The approval of Title IV was expected to open a floodgate of new investment capital for startups; VC, private equity, and hedge fund firms; and crowdfunding organizations. While some investment has occurred, strict SEC regulations on crowdfunding continue to exist that make it too costly and create barriers that may deter companies from using this funding strategy.  

Women Seek to Gain Ground in the Venture Capital Industry

Although 50 percent of U.S. investment capital comes from women, only 20.5 percent of all VC professionals worldwide were women in 2017, according to Preqin, an alternative investment research firm. The numbers are even worse the higher one goes up the management ladder. Only 11 percent of senior alternative assets staff were women. Only 5 percent of firm directors were women. Women.VC, a nonprofit advocacy group for women in the industry, estimates that there are only 400 female venture capitalists in the entire world.

The underrepresentation of women (as well as African Americans and Latinos) in the VC industry has had a ripple effect on the business world in general. A study by Pepperdine University found that female and minority entrepreneurs were less likely to receive VC funding than their white, male colleagues. A dearth of women in the field is also making it harder for young women to enter careers in VC because they lack mentors to help them prosper in this demanding industry.

In recent years, VC firms and industry associations have taken steps to improve diversity in the industry. All Raise was founded by a group of women financial professionals with a goal of increasing the number of women in the venture-backed tech ecosystem. It has offered mentoring sessions for female founders in New York City, San Francisco, Boston, and other cities. The National Venture Capital Association launched the VentureForward initiative to provide opportunities for women and men of all ethnicities and backgrounds. According to its Web site, the initiative focuses on:

  • Providing education and training related to diversity and inclusion (D&I), human resources (HR), and harassment to VC firms and startups.
  • Sharing D&I, HR, and harassment best practices and policies for VC firms and startups to adopt.
  • Creating an online hub (https://nvca.org/ecosystem/ventureforward) for sharing information and resources on D&I, talent management and recruitment, and HR for everyone in the venture ecosystem to access.
  • Connecting VCs with a broader talent pool for their firms and a broader pool of entrepreneurs seeking funding.
  • Conducting research on D&I in the venture ecosystem.

The Women’s Association of Venture and Equity, Women.VC, the Association of Women in Alternative Investing, and other professional associations are also striving to improve diversity in the VC industry.

Despite the discouraging statistics, women have made inroads into the VC industry. An increasing number of firms have been founded by women, including:

  • BBG Ventures
  • Aligned Partners
  • Forerunner Ventures
  • Illuminate Ventures
  • Cowboy Ventures
  • Aspect Ventures
  • Belle Capital
  • Golden Seeds
  • The Women’s Venture Capital Fund
  • Monitor Ventures

Some firms, including FemaleFoundersFund, are completely comprised of female partners, analysts, and support staff.