Early History of Private Equity - Early Venture Capital and The Growth of Silicon Valley (1959 - 1981)

1981)

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. As a result, venture capital came to be almost synonymous with technology finance.

It is commonly noted that the first venture-backed startup was Fairchild Semiconductor (which produced the first commercially practicable integrated circuit), funded in 1959 by what would later become Venrock Associates. Venrock was founded in 1969 by Laurance S. Rockefeller, the fourth of John D. Rockefeller's six children as a way to allow other Rockefeller children to develop exposure to venture capital investments.

It was also in the 1960s that the common form of private equity fund, still in use today, emerged. Private equity firms organized limited partnerships to hold investments in which the investment professionals served as general partner and the investors, who were passive limited partners, put up the capital. The compensation structure, still in use today, also emerged with limited partners paying an annual management fee of 1-2% and a carried interest typically representing up to 20% of the profits of the partnership.

An early West Coast venture capital company was Draper and Johnson Investment Company, formed in 1962 by William Henry Draper III and Franklin P. Johnson, Jr. In 1964 Bill Draper and Paul Wythes founded Sutter Hill Ventures, and Pitch Johnson formed Asset Management Company.

The growth of the venture capital industry was fueled by the emergence of the independent investment firms on Sand Hill Road, beginning with Kleiner, Perkins, Caufield & Byers and Sequoia Capital in 1972. Located, in Menlo Park, CA, Kleiner Perkins, Sequoia and later venture capital firms would have access to the burgeoning technology industries in the area. By the early 1970s, there were many semiconductor companies based in the Santa Clara Valley as well as early computer firms using their devices and programming and service companies. Throughout the 1970s, a group of private equity firms, focused primarily on venture capital investments, would be founded that would become the model for later leveraged buyout and venture capital investment firms. In 1973, with the number of new venture capital firms increasing, leading venture capitalists formed the National Venture Capital Association (NVCA). The NVCA was to serve as the industry trade group for the venture capital industry. 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. It was not until 1978 that venture capital experienced its first major fundraising year, as the industry raised approximately $750 million. During this period, the number of venture firms also increased. Among the firms founded in this period, in addition to Kleiner Perkins and Sequoia, that continue to invest actively are:

• TA Associates, a venture capital firm (and later leveraged buyouts as well), originally part of the Tucker Anthony brokerage firm, founded in 1968;
• Mayfield Fund, founded by early Silicon Valley venture capitalist Tommy Davis in 1969;
• Apax Partners, the firm's earliest predecessor, the venture capital firm Patricof & Co. was founded in 1969 and subsequently merged with Multinational Management Group (founded 1972) and later with Saunders Karp & Megrue (founded 1989);
• Menlo Ventures, co-founded by H.DuBose Montgomery in 1976;
• New Enterprise Associates founded by Chuck Newhall, Frank Bonsal and Dick Kramlich in 1978;
• Oak Investment Partners founded in 1978; and
• Sevin Rosen Funds founded by L.J. Sevin and Ben Rosen in 1980.

Venture capital played an instrumental role in developing many of the major technology companies of the 1980s. Some of the most notable venture capital investments were made in firms that include:

• Tandem Computers, an early manufacturer of computer systems, founded in 1975 by Jimmy Treybig with funding from Kleiner, Perkins, Caufield & Byers.

• Genentech a biotechnology company, founded in 1976 with venture capital from Robert A. Swanson.

• Apple Inc., a designer and manufacturer of consumer electronics, including the Macintosh computer and in later years the iPod, founded in 1978. In December 1980, Apple went public. Its offering of 4.6 million shares at $22 each sold out within minutes. A second offering of 2.6 million shares quickly sold out in May 1981.

• Electronic Arts, a distributor of computer and video games found in May 1982 by Trip Hawkins with a personal investment of an estimated $200,000. Seven months later in December 1982, Hawkins secured $2 million of venture capital from Sequoia Capital, Kleiner, Perkins and Sevin Rosen Funds.

• Compaq, 1982, Computer manufacturer. In 1982, venture capital firm Sevin Rosen Funds provided $2.5 million to fund the startup of Compaq, which would ultimately grow into one of the largest personal computer manufacturers before merging with Hewlett Packard in 2002.

• Federal Express, Venture capitalists invested $80 million to help founder Frederick W. Smith purchase his first Dassault Falcon 20 airplanes.

• LSI Corporation was funded in 1981 with $6 million from noted venture capitalists including Sequoia Capital and Menlo Ventures. A second round of financing for an additional $16 million was completed in March 1982. The firm went public on May 13, 1983, netting $153 million, the largest technology IPO to that point.