Before there was venture capital, before there were “special situations,” there was simply money. Big money. Mostly wealthy East Coast J.H. Whitney and Rockefeller kind of money. And deals, at least East Coast venture deals, were being done as early as the 1930s.
Technically, the first West Coast venture firm was Draper Gaither & Anderson, founded by Bill Draper’s father, William Draper Jr., in 1958. Prior to that, there were merely scattered individuals and select investment firms investing money in “special situations.” People like Reid Dennis invested as individuals while keeping their day jobs in San Francisco’s financial district. Dennis worked at Fireman’s Fund Insurance before founding Institutional Venture Partners (IVP).
One of the lesser noted but defining moments in the emergence of venture capital came in 1958. It was right after the Korean War, and the government had just passed the Small Business Investment Act (SBIA), allowing individuals to apply for Small Business Investment Corporation (SBIC) licenses. Ultimately, it played no small role in helping launch two of the five Old Guard firms.
Just as it does to this day, an SBIC license provides matching funds for those willing to invest in new companies. The government is supportive because new companies create jobs and grow tax revenue. The SBIC would match at a multiple of at least two to three times an investment. Better yet, the U.S. government was a limited partner that didn’t need 80% of a firm’s carry: It just wanted its money back.
Some Old Guard members created firms on their own. Art Rock, for instance, corralled a trusted group of wealthy individuals to start Arthur Rock & Co.
But the SBIA was key to the formation of Draper & Johnson, Paul Whythes’ Sutter Hill Ventures and countless other firms that followed. The SBIA “was the pilot light of American industry,” says Pitch Johnson. That’s probably why he, Draper and Wythes feel so patriotic about giving something back to the United States and are so appalled that young VCs don’t feel the same sense of gratitude.
Thanks to Uncle Sam, Sutter Hill is the longest-running evergreen fund in Silicon Valley, with a return of 37% per annum over a calculated 31 years (1970-2000). “I defy anyone to do that for 31 years straight,” says Wythes proudly.