The venture capital industry began predominantly as a North American phenomenon. It had its origin in the offices that managed the wealth of financially successful individuals in the late 19th and early 20th century. The modern venture capital industry began taking shape in the post - World War II years. It is often said that people decide to become entrepreneurs because they see role models in other people who have become successful entrepreneurs. Much the same thing can be said about venture capitalists. The earliest members of the organized venture capital industry had several role models, including these three:

1. American Research and Development Corporation, formed in 1946, whose biggest success was Digital Equipment. The founder of ARD was General Georges Doroit, a French-born military man who is considered "the father of venture capital." In the 1950s, he taught at the Harvard Business School. His lectures on the importance of risk capital were considered quirky by the rest of the faculty, who concentrated on conventional corporate management.

2. J.H. Whitney & Co, also formed in 1946, one of whose early hits was Minute Maid juice. Jock Whitney is considered one of the industry's founders.

3. The Rockefeller Family, and in particular, L S Rockefeller, one of whose earliest investments was in Eastern Airlines, which is now defunct but was one of the earliest commercial airlines.

The Second World War produced an abundance of technological innovation, primarily with military applications. They include, for example, some of the earliest work on micro circuitry. Indeed, J.H. Whitney's investment in Minute Maid was intended to commercialize an orange juice concentrate that had been developed to provide nourishment for troops in the field.

In the mid-1950s, the U.S. federal government wanted to speed the development of advanced technologies. In 1957, the Federal Reserve System conducted a study that concluded that a shortage of entrepreneurial financing was a chief obstacle to the development of what it called "entrepreneurial businesses." As a response to this a number of Small Business Investment Companies (SBIC) were established to "leverage" their private capital by borrowing from the federal government at below-market interest rates. Soon commercial banks were allowed to form SBICs and within four years, nearly 600 SBICs were in operation.

At the same time a number of venture capital firms were forming private partnerships outside the SBIC format. These partnerships added to the venture capitalist's toolkit, by offering a degree of flexibility that SBICs lack. Within a decade, private venture capital partnerships passed SBICs in total capital under management.

The 1960s saw a tremendous bull IPO market that allowed venture capital firms to demonstrate their ability to create companies and produce huge investment returns. For example, when Digital Equipment went public in 1968 it provided ARD with 101% annualized Return on Investment (ROI). The US$70,000 Digital invested to start the company in 1959 had a market value of US$37mn. As a result, venture capital became a hot market, particularly for wealthy individuals and families. However, it was still considered too risky for institutional investors.

In the 1970s, though, venture capital suffered a double-whammy. First, a red-hot IPO market brought over 1,000 venture-backed companies to market in 1968, the public markets went into a seven-year slump. There were a lot of disappointed stock market investors and a lot of disappointed venture capital investors too. Then in 1974, after Congress legislation against the abuse of pension fund money, all high-risk investment of these funds was halted. As a result of poor public market and the pension fund legislation, venture capital fund raising hit rock bottom in 1975.

Well, things could only get better from there. Beginning in 1978, a series of legislative and regulatory changes gradually improved the climate for venture investing. First Congress slashed the capital gains tax rate to 28% from 49.5%. Then the Labor Department issued a clarification that eliminated the pension funds act as an obstacle to venture investing. At around the same time, there were a number of high-profile IPOs by venture-backed companies. These included Federal Express in 1978, and Apple Computer and Genetech Inc in 1981. This rekindled interest in venture capital on the part of wealthy families and institutional investors. Indeed, in the 1980s, the venture capital industry began its greatest period of growth. In 1980, venture firms raised and invested less than US$600 million. That number soared to nearly US$4bn by 1987. The decade also marked the explosion in the buy-out business.

Funds flowing into the venture capital industry and the number of active venture organisations increased dramatically during the late 1970s and early 1980s. An important factor attributed to the increase in money flowing into the venture capital sector was the 1979 amendment to the "prudent Man" rule governing pension fund investments. Prior to 1979, the Employee Retirement Income Security Act (ERISA) limited pension funds from investing substantial amounts of money into venture capital or other high-risk asset classes. The amendment allowed pension funds to invest in high-risk assets, including venture capital. Thus, while in 1978, pension funds supplied just 15 per cent of venture capital funds, currently over 50 per cent of investments in venture capital comes from institutional public and pension funds, with the balance coming from endowments, foundations, insurance companies, banks, individuals and other entities.

The late 1980s marked the transition of the primary source of venture capital funds from wealthy individuals and families to endowment, pension and other institutional funds. The surge in capital in the 1980s had predictable results. Returns on venture capital investments plunged. Many investors went into the funds anticipating returns of 30% or higher. That was probably an unrealistic expectation to begin with. The consensus today is that private equity investments generally should give the investor an internal rate of return something to the order of 15% to 25%, depending upon the degree of risk the firm is taking.

However, by 1990, the average long-term return on venture capital funds fell below 8%, leading to yet another downturn in venture funding. Disappointed families and institutions withdrew from venture investing in droves in the 1989-91 period. The economic recovery and the IPO boom of 1991-94 have gone a long way towards reversing the trend in both private equity investment performance and partnership commitments.

According to data published by Venture One Corporation, amount invested by venture capitalists in US industry increased from $ 7 billion in 1995 to $ 11.5 billion in 1997. Of this, $ 7.1 billion was invested in the Information Technology industry, $ 2.6 billion in Health Care and $ 1.7 billion in Retail and Consumer industry.

In 1998, the venture capital industry in the United States continued its seventh straight year of growth. It raised US$25bn in committed capital for investments by venture firms, who invested over US$16bn into domestic growth companies in all sectors, but primarily focused on information technology.

The Israeli Government initiated two programmes to encourage venture capital funds in 1991, which led to increase in such funds from $ 29 million in 1991 to $ 550 million in 1997, as well as a spurt in investment in high technology companies.

Singapore aggressively began promoting venture capital funds by providing tax incentives and through other measures in 1995, which led to a dramatic rise in investment activity in high technology R & D activity.