January 20, 2015 - As the old adage goes, history often repeats itself, and speculators are always trying to figure out when the next bubble will burst. Entrepreneurs have a lot to learn from venture capitalists and the history and trends that inform their investment decisions. In this blog post, we summarize the history of venture capital as written by Jerry Neumann in this article. Read on for main takeaways and trends by decade - all of which may be a hint of what's to come.
As technology improved, time truly became an item of luxury. If a venture capitalist moved too slow, that VC might miss out on a deal of a lifetime. VCs knew they had to move quickly not only to keep up with the times, but also to secure deals.
Lessons of the 1960s
Time is a luxury. It not only affects VCs, but also entrepreneurs. The more VCs you know, the better - meet and stay in contact with as many as you can.
A change in government regulations allowed pension funds to be considered a “prudent” investment. This spurred change within the venture capital community because VCs were now armed with pension funds as extra money, which they then used to invest in early stage companies.
￼￼Lessons of the 70s
You better believe venture capitalists stay up-to-date on government policies, and you should too. Information is power, and past, present, and future venture capital will continue to be influenced by government in some way, shape, or form.
As an entrepreneur, you can use the fact that venture capitalists are getting in early on your company to always ask for help and mentorship. Early VCs will be just as interested in your success as you are.
Venture capitalists realized what were once top returning sectors were no longer the top returning sectors. Something had to give, and VCs started to invest in different directions and new sectors. Many VCs ended up investing in later-stage companies and already-established markets, thereby going against what they had learned in the 70s about investing in early stage and not heavily established markets.
Lessons of the 80s
Venture capitalists are always looking for diamond-in-the-rough sectors to invest in, but sometimes they accidentally miss them or just aren’t positioned correctly.
The Internet changed everything. After seeing the early successes of Internet companies like Amazon and Netscape and their IPOs, venture capitalists ramped up investments in Internet companies. An influx of VCs looking to invest meant an influx of money so that anybody and everybody associated with the Internet received investment from VCs.
Lesson of the 90s
Venture capitalists are human and follow visible trends. If you stay up on the latest trends, you may literally be "following the money" is those trends become a reality.
The hype caught up to venture capitalists. Unfulfilled promises sent stock prices tumbling thus defining the 2000s as the era of the dot com crash. However, because of their investments, VCs helped usher in a new era of technology, and their failed investments may have actually helped humanity in the long run.
Lesson of the early 2000s
Venture capitalists, entrepreneurs, and humans in general make mistakes all the time. Was believing the Internet hype justifiable? In a way, yes, but it did cost a pretty penny. By using and learning from your own and others' mistakes, you can bounce back and ultimately help others.
Not all was lost in the 2000s. Social media took off like a rocket and created another market for venture capitalists to get into. VCs have backed well-known social media companies that now shape our daily lives and habits.
Lesson of the late 2000s
Just like entrepreneurs, venture capitalists will fail and fail again until they succeed. VCs were willing to give Internet companies another chance, and it was a good thing they did or we may not have Facebook and Google was we know them today.
There are thousands and thousands of companies in already established markets seeking funding from venture capitalists. If this trend continues, VCs, entrepreneurs, and the rest of the world may face stagnation. VCs are in danger of returning back to the ways they invested in the 1980s.
Lessons from Today
History seemingly repeats itself at will. Entrepreneurs and venture capitalists must be aware of history and use it to their advantage.
Recap of Lessons Learned by VCs
- 1960s: Use time wisely
- 1970s: Information is power and success is more likely with a team
- 1980s: When opportunity knocks, open the door
- 1990s: Trends might become future reality - stay at the forefront
- Early 2000s: Learn from your mistakes
- Late 2000s: Fail and fail until you succeed
- Today: Be brave