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Early Venture Capital Funding

The passing of the Small Business Investment Act of 1958, one of the first professional steps in early Venture capital funding allowed the licensing and financing of the small entrepreneurial businesses in US. These expanding companies were setting out to exploit breakthroughs in electronic, medical or data-processing technology. It was no surprise to see the venture capital funding in the beginning becoming almost synonymous with technology finance. Some examples of theses are the Fairchild Semiconductor funded in 1959, which would later be known as Venrock Associates.

The regular form of private equity fund, which is still used today, emerged in the 1960s.

Limited partnerships were organized by private equity firms for holding investments. The investment professionals, serving as general partners and the investors, placed the capital.

The expansion of the early Venture capital funding industry was stimulated by the surfacing of the independent investment firms. Kleiner, Perkins, Caufield & Byers and Sequoia are some examples. Early computer firms using their devices and programming and service companies were now beginning to set up. With the rising number of new venture capital firms, the National Venture Capital Association or NVCA was formed in 1973. its objective was to serve the industry trade group for the venture capital industry, as the momentary downturn in 1974, had crashed the stock market and investors were naturally cautious of this new kind of investment fund.

It was in1978 that the early Venture capital funding witnessed its first major fundraising, with the industry raising approximately $750 million. The Employee Retirement Income Security Act (ERISA), passed in 1974, bared the corporate pension funds to hold certain risky investments which included many investments in privately held companies.

The public success of the early venture capital funding industry in the 1970s and 1980s gave rise to a major propagation of venture capital investment firms. By the end of the 1980s, there were nearly a thousand firms from just a few at the start of the decade. Although the number of firms grew, there was only an 11% increase in the capital managed by these firms.

The mid-1980s saw losses for the first time by certain venture firms by sharply waning returns. This led to a slowdown in the growth of the industry. Several other factors also affected the returns in addition to the growing competition among firms. After the collapse of the stock market in 1987, there was a lull in the market for initial public offerings.

Venture capital funding in the beginning, as a response to the changing circumstances, saw some corporations which had sponsored in-house venture investments, either sold off or closed. Some others began to shift began their attention from funding premature companies towards investing in more mature and experienced companies.