The venture capital industry is expansive, exciting, and very closed. While the underlying concepts of how venture capital firms work are well known, their internal operations are typically kept secretive. This is often because of the sensitive nature of the investments being reviewed by venture capitalists. Additionally, VC firms compete against each other to make large scale lucrative investments. Their secrecy is often compounded by the fact that despite the fact that they manage billions of dollars of investment funds while earnings millions (if not billions) of dollars in fees, the staff of venture capital firms is relatively small. Some of the largest venture capital investment firms in the world only employ 300 to 500 people.
Many investment professionals and financial historians state that the start of the rapid increase in the number of
venture capital firms within the
United States began in the 1980’s. These firms borrowed a similar business model as that of hedge fund management companies. Investments from accredited investors (or sophisticated investors) are pooled into a fund, investments are made, investments are sold, and if they are profitable then investors receive 80% of the profits and the firm receives 20%. Hedge funds have been operating with this business model since 1949 (when the first official hedge fund was formed).
As of 2010, there are approximately 800 firms that identify themselves as venture capitalists. According to the National Venture Capital Association, these firms aggregate had approximately $257 billion dollars under management with the average venture capital fund having a capitalization of $166 million.
The demand among investors to investment in venture capital funds has waned over the past ten years. The dot com bubble at the turn of the millennium prompted many groups and individuals to shift their funds into other types of investment funds such as private equity companies. This is primarily because private equity firms shy away from investing in small and start up businesses.
