Business History seminar - Limited Partnerships and the Genesis of the American Venture Capital Industry

Abstract:

The most remarkable developments in productivity history and in innovation more broadly in living memory have taken place in the so-called Silicon Valley area of Northern California. The early development and growth of the firms carrying out the innovation has been funded by venture capitalists.

The history of the venture capital industry has been written for the most part in two strains. One for relatively popular audiences largely in terms of the VC firms’ investments (and focused much more on the handful of great successes than on the much more common merely modest successes or outright failures). The other for economists and finance academics and professionals in terms of the economic structure and clever incentive alignment in what became the standard forms of contracts between investors in venture capital funds and the VC firms themselves on the one hand and between the VC firms and their portfolio investments on the other. A critical review of the only extant scholarship on the first Bay area firm making new venture investments reminds readers that markets often do not swiftly identify efficient solutions to novel problems and opportunities.

This paper examines the logic and history of the limited partnership as a form of innovation finance. That history is much more interesting than simple efficiency-oriented accounts might suggest and the paper brings out the structural role—contingent, agentic, and wildly underappreciated—and content of the contribution of “transaction engineer” lawyers and other actors in designing structures which innovated to solve emerging problems, address the emerging opportunities, and generally provide the organizational infrastructure of the history we do know.