Venture Capital

Many important events—such as the founding of professional VC associations; new laws, such as the Jumpstart Our Business Startups Act of 2012; and the slow, but steady, emergence of women in venture capital—have shaped the VC industry.

The First Professional VC Associations

Although the first publicly owned venture capital firm (American Research and Development Corporation) was launched in 1946, the industry remained largely unorganized for more than 15 years. It had no professional association to represent its interests in Washington D.C. and state capitals, no organized public relations strategy, and no industry publication that served as a sounding board for the various VC firms that were scattered across the U.S. In 1962, that began to change when some of the industry’s original West Coast venture investors began meeting in San Francisco’s Olympic Club to network and make deals. The group met informally until 1969, when it became the first official nonprofit VC capital organization in the world—the Western Association of Venture Capitalists. Today, the association is comprised of more than 100 venture firms and more than 1,000 venture capitalists.

The Western Association of Venture Capitalists provided excellent representation to West Coast venture capitalists, but as the VC industry expanded and encountered growing pains (including regulatory challenges), there still was a need for a national organization that could represent the interests of VC firms throughout the country. That organization finally arrived in 1973, when the National Venture Capital Association (NVCA) was founded in the offices of the Heizer Corporation, a leading VC firm. According to a 1973 news story in SBIC/Venture Capital, the NVCA was founded “as a means for venture capital organizations throughout the country to work together on mutual interests and problems. Membership is by invitation and open only to venture capital groups, corporate managers, and individual venture capitalists that are responsible for investing private capital in young companies on a professional basis.” The NVCA began immediately lobbying members of Congress to change existing laws and create new laws that would make it easier for VC firms to conduct business. One of the NVCA’s signature victories occurred in 1978 when it convinced the federal government to change the pension plan rules under the Employee Retirement Income Security Act, making it possible for pension funds to invest in alternative (and potentially higher-risk) asset classes such as venture capital funds. This change generated a massive increase in the pool of money that was available to venture capitalists, and the industry flourished

The National Venture Capital Association remains the voice of the U.S. venture capital community. It is comprised of more than 380 venture capital firms and corporate venture groups that are actively investing in innovative, growth-oriented startup companies.

The Dodd-Frank Wall Street Reform and Consumer Protection Act and New Efforts to Deregulate the Industry

In response to financial scandals and the economic recession in the late-2000s, the federal government began to look more closely at the financial sector. As a result, regulation of the VC industry increased to some extent. The Dodd-Frank Wall Street Reform and Consumer Protection Act was passed in 2010. It required all hedge fund advisers and private equity managers with more than $150 million in assets under management to register with the Securities and Exchange Commission (SEC) and to hire a chief compliance officer to create and monitor a compliance program, among other rules. Although VC managers were not required to register, the law’s definition of a venture capital fund caused many entities that were primarily engaged in VC investing, but used other investment strategies, to be required to comply with the law. In 2011, the SEC revised the definition of a VC fund, which exempted many VC firms from having to register with the SEC and meet compliance requirements. To be exempt from the SEC requirement, VC firms must have at least 80 percent of their money invested in shares of private companies and as much as 20 percent of their funds in shorter-term investments.

Additionally, the Volcker Rule, a provision of Dodd-Frank, restricted banks from conducting certain investment activities with their own funds and prohibited them from investing in or sponsoring venture capital, private equity, and hedge funds in most cases.

In recent years, the Congress reversed some of the provisions of Dodd-Frank and reduced regulation of the alternative investment industry. The Economic Growth, Regulatory Relief and Consumer Protection Act of 2018 changed the financial threshold in which banks could be classified as “systematically important financial institutions” from those that had more than $50 billion in assets to those with $250 billion in assets. Additionally, the act also provides smaller banks with relief from the Volcker Rule. In 2019, five federal financial regulatory agencies adopted a final rule to exclude community banks with less than $10 billion in assets and total trading assets and liabilities of 5 percent or less of total consolidated assets from the Volcker Rule. In 2020, these agencies revised the “covered funds” component of the Volcker Rule to allow banking entities to invest their own money in covered funds (e.g., venture capital funds, credit funds, family wealth management vehicles, customer facilitation funds) without limitation as long as they do not engage in proprietary trading and meet other requirements. “This rule change could permit venture capital funds to tap previously unavailable pools of capital, and make it easier for banks to invest in startups and other early-stage ventures,” according to JD Supra, a firm that provides information and news resources to the legal industry.

In 2023, the Securities and Exchange Commission adopted amendments to Form PF (the confidential reporting form for certain SEC-registered investment advisers to private funds). The amendments require all private fund advisers with at least $150 million in private funds assets under management to file current reports regarding the occurrence of reporting events that could indicate significant stress at a fund or investor harm. The SEC says that the “amendments are designed to enhance the ability of the Financial Stability Oversight Council to assess systemic risk and to bolster the commission’s oversight of private fund advisers and its investor protection efforts.” Reporting events for fund advisers include certain fund termination events, the removal of a general partner, and the occurrence of an adviser-led secondary transaction. These amendments will increase demand for both risk management and compliance professionals at venture capital firms. The SEC has also proposed new rules and amendments under the Investment Advisers Act of 1940 as a way to protect private fund investors and enhance the regulation of private fund advisers.

The Jumpstart Our Business Startups Act of 2012 (commonly known as the JOBS Act) is one other noteworthy law. It allows VC and other alternative funds to advertise and perform general solicitations, with the ultimate goal of reaching a larger number of investors. After years of delay, the SEC approved Title IV of the law in 2015. This ruling allows entrepreneurs to begin raising money from average investors (i.e., the crowd, or those who do not meet high-wealth standards). The approval of Title IV was expected to open a floodgate of new investment capital for startups; VC, private equity, and hedge fund firms; and crowdfunding organizations. While some investment has occurred, strict SEC regulations on crowdfunding continue to exist that made it too costly and created barriers that deterred companies from using this funding strategy. In 2020, the SEC loosened some of its crowdfunding regulations to “facilitate capital formation and increase opportunities for investors by expanding access to capital for small and medium-sized businesses and entrepreneurs across the United States.”

Women Gaining Ground in the Venture Capital Industry

Although 50 percent of U.S. investment capital comes from women, only 26 percent of VC professionals in investment positions in the U.S. in 2022 were women, according to the VC Human Capital Survey. This was a slight increase from 23 percent in 2020. (The survey was conducted by Deloitte, Venture Forward, and the NVCA, and the results were published in March 2023.) “Firms founded within the last ten years had more women in investment positions (30 percent) than did older firms (24 percent),” according to the VC Human Capital Survey. “Firms focused on the seed investment stage (32 percent) also had a higher representation of female employees among investment professionals than those focused on early-stage (26 percent), multi-stage (26 percent), or growth (24 percent).” In 2022, only 2 percent of investment positions were held by African American women (up from 1 percent in 2020). Hispanic women held 2 percent of investment positions in 2022 (up from 1 percent in 2020). In 2022, female Asian/Pacific Islander women held 9 percent of investment positions, an increase from 6 percent in 2020.

The overall percentage of women who are employed at VC firms was better. Women comprised 47 percent of the total VC workforce—up from 45 percent in 2020. “Women comprised 48 percent of the workforce at large firms (21 employees or more), compared to 44 percent at mid-sized firms (six to 20 employees), and 38 percent at small firms (five employees or fewer),” according to the VC Human Capital Survey.

Worldwide, women only made up 23.8 percent of the employees in VC firms in January 2023, according to Preqin. The alternative investment research firm says that “the majority of women in senior positions globally are either chief financial officers or chief operating officers, at 29.7 percent and 26.5 percent, respectively. These are non-investment roles. Less than 10 percent of founders or CEOs in VC are women. Clearly, women in investment-related leadership roles are underrepresented globally within the asset class.”

The underrepresentation of women (including African Americans and Latinos) in the VC industry has had a ripple effect on the business world in general. A study by Pepperdine University found that female and minority entrepreneurs were less likely to receive VC funding than their white, male colleagues. A dearth of women in the field is also making it harder for young women to enter careers in VC because they lack mentors to help them prosper in this demanding industry.

In recent years, VC firms and industry associations have taken steps to improve diversity in the industry. All Raise was founded by a group of women financial professionals with a goal of increasing the number of women in the venture-backed tech ecosystem. It has offered mentoring sessions for female founders in New York City, San Francisco, Boston, and other cities. The National Venture Capital Association launched the Venture Forward nonprofit to provide opportunities for women and men of all ethnicities and backgrounds. According to its Web site, the nonprofit focuses on:

• Providing education and training related to diversity and inclusion (D&I), human resources (HR), and harassment to VC firms and startups.
• Sharing D&I, HR, and harassment best practices and policies for VC firms and startups to adopt.
• Creating an online hub for sharing information and resources on D&I, talent management and recruitment, and HR for everyone in the venture ecosystem to access.
• Connecting VCs with a broader talent pool for their firms and a broader pool of entrepreneurs seeking funding.
• Conducting research on D&I in the venture ecosystem.

The Women’s Association of Venture and Equity, Women in VC, and other professional associations are also striving to improve diversity in the VC industry. Additionally, Golden Seeds, Astia, Plum Valley, and other angel networks are providing seed capital to promising female founders. And Softbank, Andreessen Horowitz, and other VC firms have started initiatives that provide capital to entrepreneurs of color and those from other underserved groups.

Despite the discouraging statistics, women have made inroads into the VC industry. An increasing number of firms have been founded by women, including:

• BBG Ventures
• Aligned Partners
• Forerunner Ventures
• Illuminate Ventures
• Cowboy Ventures
• Aspect Ventures
• Belle Capital
• Golden Seeds
• Women’s VCFund II

Some firms, including FemaleFoundersFund, are completely comprised of female partners, analysts, and support staff. It invests exclusively in female-founded companies.

The COVID-19 Pandemic and the Venture Capital Industry

In late 2019, the coronavirus COVID-19 was detected in China and quickly spread to more than 210 countries, and caused more than 704 million infections and more than seven million deaths (through April 2024), as well as massive business closures and job losses. In the short-term, the COVID-19 pandemic negatively affected the health of individuals; employment opportunities at businesses, nonprofits, and government agencies; and daily life. The pandemic also affected job-seekers and employees. Some companies cancelled or delayed internships and other experiential learning opportunities, while others converted them to an online format. Onboarding of new hires was either delayed or moved online by many companies. Most employers transitioned in-person interviews to telephone and online equivalents, and many businesses required their employees to work at home some or all of the time.

The pandemic had both negative and positive effects on the venture capital sector. Like other sectors, many VC employees were forced to work remotely, and the hiring and onboarding process was moved online. The lockdowns made it much harder—and sometimes impossible—for firms to source deals, fundraise (although virtual fundraising efforts were initiated by some companies), complete due diligence on target companies, and effectively manage their portfolio companies. From roughly March to June 2020, only 541 VC deals were made in the seed to Series B stages, a 44 percent decline from the same time span in 2019. The decline was most pronounced in seed-stage deals (especially in travel tech and other areas hit hard by the pandemic). Valuations of some portfolio or target companies also declined because of stagnant sales or other stresses on their businesses. New weaknesses were also revealed at some portfolio or target companies as the pandemic caused sales to drop, manufacturing supply lines to be severed, or operating capital to dry up. Many startups laid off employees to reduce expenditures—and some closed forever. On the positive side, the pandemic “accelerated a digital transformation in healthcare, making health tech and digital health solutions a hotbed for venture capital investment,” according to Foley & Lardner LLP, a law firm that provides legal expertise in the energy, health care and life sciences, innovative technology, and manufacturing sectors.