A (Very) Brief Venture Capital Explainer for the Newly Initiated
We are actively raising our first fund at Fission Ventures, and it’s aimed at providing accredited investors access to deals that were formerly only available to institutional investors and ultra-high-net-worth family offices. Naturally, when I speak with Columbia alums who haven’t had exposure to venture investing before, there are questions about Fission’s model and the wider venture world. I’ve attempted to briefly answer a few in this month’s column.
When and where did venture capital originate?
Reasonable people disagree on where venture capital began. Some say its origins are in the 11th century, with the Lombardy, Italy-based merchant banks that funded grain and cloth producers. Others suggest it was Queen Elizabeth, or any sovereign ruler, who backed an expedition. In the U.S., scholars note that the 19th century whaling industry sparked a watershed period for American entrepreneurship and venture financing.
As a formal industry in the U.S., however, venture capital’s origins are generally pinned to 1946. That year marked the founding of J.H. Whitney and American Research and Development Corp, which helped soldiers returning from WWII launch businesses. Twelve years later, in 1958, small business lending was greatly expanded when the Small Business Investment Act was passed.
Should you want to learn more, Wikipedia has a good and brief rundown on the history of venture’s origins.
How is venture capital structured? Who invests in venture deals?
Venture is generally characterized by a General Partner (GP)/Limited Partner (LP) structure — much like its private equity brethren. At the risk of oversimplification, GPs run the fund — sourcing, analyzing, structuring, and managing the investment pools — while LPs provide the capital.
Loosely, LPs fall into the following buckets: university endowments, foundations, pension funds, sovereign wealth funds, fund-of-funds, and family offices. In 2012, after the passage of Jumpstart Our Businesses Startup (JOBS) Act, which changed the rules around marketing private investments, our parent company AVG started reaching out to accredited investors, offering access to venture capital to people who hadn’t previously had much exposure to it.
While there is no universal reason why LPs invest in venture capital, a recent survey in Institutional Investor found that the majority of them believe that, as an asset class, venture capital produces a diversified, non-correlated return to the major benchmark indices: S&P 500, Nasdaq, Russell 3000, and Dow Jones Industrial Index.
How does venture compare to other “alternative” assets?
While growing, the venture capital industry is significantly smaller than other “alternative” asset classes. For perspective, AUM[BO1] (assets under management) at hedge funds and private equity firms is roughly $3 trillion each. Bank funding, corporate R&D, and M&A also dwarf the overall venture industry.
According to PitchBook and the National Venture Capital association, in 2017:
· Assets under management (AUM) across venture capital topped $400 billion
· More than $30 billion was raised by venture funds
· More than $84 billion was invested
· Deal value was more than $3 trillion
Despite its relatively small assets under management, VC has a huge effect on the overall business landscape. A study conducted at the Stanford Graduate School of Business found that 43% of U.S. public companies founded since 1979 were funded by venture capital. These companies now account for 38% of all employees and 57% of the total U.S. market capitalization. They also drive 82% of all R&D spending — a proxy for further innovation growth — in the United States.
Where will Fission’s series on VC will go next?
Along with offering our LPs promising diversified portfolios connected to fellow alums, one of our goals at Fission is to offer transparency and to educate our investors about how venture capital works. The next piece in this monthly series will answer other questions that we often get, such as:
What are venture capital return structures?
Why does AVG, and the industry, raise funds in vintages?
How does AVG make money, and why are our fees structured the way they are?
If there is a question you would like answered in this column, please reach out with a suggestion.
As always, we thank you for your interest and support. Learn more about Fission Ventures.
 This number does not include Softbank’s $100 billion megafund.