This August, I made another trip to Silicon Valley, marking five years since my last visit. Back then, Silicon Valley was buzzing with discussions about learning from various 2C business models in China, including giants like ByteDance, Pinduoduo, and Meituan. Many Chinese professionals working in Silicon Valley were contemplating the idea of returning to China to start their own businesses. Looking back, it feels like a lifetime ago.
So much has unfolded in the past few years, from trade tensions to COVID-19, accelerating the decoupling between the United States and China. Under this decoupling, there have been monumental shifts in financial strategies, talent strategies, and corresponding policies. Talent mobility, as one of the earliest indicators of these policy changes, has also taken on a whole new dynamic.
During my recent visit to Silicon Valley, the most notable change I observed was that while Chinese individuals used to discuss how to return to China for entrepreneurial ventures, the current focus is more on how to stay in the United States and participate in fields like AI. Silicon Valley has seen an influx of talent from India, China, Europe, the Middle East, and beyond. Although the VC market in the United States may not be as robust as before, the entrepreneurial ecosystem built over decades continues to provide a steady stream of funding, resources, and network support.
In the coming days, I will provide a comprehensive overview of my observations during this visit to Silicon Valley. In the first piece, I will delve into the history of venture capital in the United States, as understanding this history is crucial to comprehending the wellspring of America’s strong talent and entrepreneurial culture.
Venture Capital: Unveiling its Essence
Venture capital, often referred to as VC, is like a valuable treasure rooted in the United States. It embodies the true spirit of the American free market system, characterized by fierce competition and the relentless pursuit of capital gains. The success of VC unveils the remarkable transformation and acceptance of capitalism in the United States.
Venture capital returns are akin to sporadic discoveries, arising from patent mechanisms and breakthrough technologies. In 2014, a prominent US fund achieved a staggering 52% of its returns from a mere 6% of its investment portfolio, yielding over 10 times the initial investment. This industry serves as a catalyst for significant transformations and breakthroughs.
VC funds are structured as limited partnerships, with a relatively short lifespan of around 10 years, which distinguishes them from long-lasting companies. This inherent time constraint imposes limitations on investment returns.
The triumph of American VC can be attributed to the interplay of specific cultural and regulatory conditions, influenced by historical serendipities — Factors such as tax policies, the influx of high-tech immigrants, a high tolerance for risk, and the involvement of university endowment funds in VC investments have contributed to its growth.
Evolution of VCs in the USA
The evolution of venture capital in the US can be likened to a captivating tale comprised of four distinct chapters.
- The first chapter, spanning from 1900 to 1939, witnessed the era of informal financing, where visionary angel investors provided crucial funds. Notable industrialist families like Rockefeller, Carnegie, and Whitney played pivotal roles in supporting the growth of the industry.
- The second chapter, from 1940 to 1969, marked the formal establishment of partnership structures. In the 1950s, a pioneering institution known as ARD emerged in Boston, initially as a closed-end fund but not adopting the limited partnership format. In 1957, ARD made a groundbreaking investment in Digital Equipment Corporation, setting the stage for the formation of investment portfolios and validating the effectiveness of the “intermediary” model in the market. Towards the late 1950s, the US government introduced the “Small Business Investment Act of 1958,” establishing a dedicated division for venture capital to provide funding for small and medium-sized enterprises.
- The third chapter, from 1970 to 1989, witnessed notable cycles of prosperity and downturns in the industry, with Apple’s iconic IPO in 1984 standing out as a defining moment. During this period, the concept of top-tier venture capital firms emerged, accompanied by a focus on “scale, geographic location, and category” investments, encompassing corporate venture capital, traditional venture capital, and government-guided investments. Various players, including mezzanine investors, IPO intermediaries, and risk lenders, emerged and enriched the industry landscape.
- The fourth chapter, spanning from 1990 to 2000, unfolded as a period of diversified and expansive investment models. The 1990s witnessed the commercialization of hardware, software, telecommunications, and the internet, with noteworthy trends in software development and online services, such as the rise of B2C retail and the transition from brick-and-mortar stores to online shopping. The industry reached its zenith in 2000, with over $100 billion poured into venture capital investments within a single year. However, this euphoria was followed by the bursting of the TMT internet bubble, revealing the consequences of irrational exuberance.