Venture capital in the US is becoming a popular and essential funding source for startups. Since a startup is typically a brilliant, scalable business idea and does not own many assets in the initial days, access to traditional bank loans is a difficult prospect. This is why a specific market of venture capital has evolved to enable promising entrepreneurs to innovate and grow new businesses.
Venture Capital Investment in the US
The National Venture Capital Association (NVCA) reports that despite the 2020 global pandemic, the venture capital industry in the US has invested over $69 billion, raised by 289 funds. Venture capital funding, essentially being a type of private equity, involves only HNIs and institutions that can lend funds in billions and hold them for a considerable time. However, this type of investment is risky as the investor is essentially backing an idea and the potential of the entrepreneur to see it to fruition. Thus securing venture capital is very competitive and business proposals undergo considerable scrutiny before being hand picked for funding.
Venture capital funding not only brings in the much-needed business capital, but the expertise of the investors as well. These investors are subject experts in their fields and prove to be an invaluable addition to startup management. All investments happen in phases and conditional on equity shares in the startup. Overall, despite the risks involved, this funding mechanism proves beneficial both for investors (receives above-average returns) and for startups (easy access to bulk capital). But how did this strategy evolve? Let’s explore.
History of venture capital
The history of venture capital firms in the US dates back to World War II. Like every other innovation, the mechanism of venture capital funding too evolved out of necessity. Here is a brief progression of this industry:
- American Research and Development Corporation (ARDC): The evolution of venture capital in the US is dated back to 1946 when Harvard Business School professor Georges Doriot established the American Research and Development Corporation (ARDC). ARDC was established to invest in companies that commercialized new technologies developed during the Second World War. In a first attempt, ARDC raised $3.5 million for these investments to a company that aimed to use X-rays for cancer treatment. Doriot invested $200,000 of his money in this venture. This company went public in 1955 and Doriot received a massive return of $1.8 million! Thus Georges Doriot is also rightfully known as the “Father of Venture Capital”.
- Fairchild Semiconductor: The first technology company to receive venture capital funding in the US was Fairchild Semiconductor. Industrialist Sherman Fairchild of Fairchild Camera & Instrument Corporation was the investor. At that time, Arthur Rock, an investment banker in Hayden, Stone & Co. based in New York facilitated this deal and eventually became the first person to start Silicon Valley’s first venture capital firm Davis & Rock.
- Innovations in regulations: Every industry needs a feasible business environment to thrive. Thankfully, after the initial success of venture capital firms in the USA, regulatory bodies came forward with innovations that further helped this sector to grow and thrive.
- Silicon Valley: Since most technology-driven startups are based in Silicon Valley, most influential venture capital firms in the US are based around here as well. As the venture capital market grew in the US, diverse institutional investors joined. Thus besides the reputed venture capital firms, many giant corporations have become investors specific to their industries. For example, Google and Intel have earmarked funds to nurture emerging technologies. Starbucks and Staples are following a similar trend for their industries as well.
- 2008 Recession: The financial crisis of 2008 had a catastrophic impact on all industries. Many businesses shut down and a large number of qualified professionals lost their jobs. During this phase, venture capital firms in the USA tightened their purse strings as well. However, this is also the time when unicorns evolved, which attracted unconventional investors to enter the venture capital arena.
Since then, venture capital in the US has demonstrated an upward growth curve. According to the PitchBook – NVCA Venture monitor, by the end of 2019, the venture industry had pledged a whopping $136.5 billion in US-based companies. This is the second consecutive year in a row that the venture industry has crossed the $130 billion mark. In 2020, mega-funds of $1 billion and more represented almost 15% of the total venture capital funds raised.
Top industries with venture capital funding in the USA
The top five performing regions of venture capital firms in the US are California, Massachusetts, New York, Washington, and Texas. Of these, California alone contributes close to $14 billion, which is four times that of Massachusetts. The top industries that receive venture capitals funds are:
- Software – 31.2%
- Biotech – 15.6%
- Industrial/Energy – 10.4%
- Medical devices & equipment – 9.2%
How venture capitalists firms and venture capital funding help startups?
Startups are typically cash strapped. Since they are just starting, unlike established companies, startups do not have the necessary financial documents to demonstrate stable revenues. Thus fundraising becomes challenging. However, with the growth of venture capital firms in the US who understand the limitations of startups and are ready to provide the necessary support in terms of money and strategic inputs, the startup marketplace has begun to thrive. Here are some fundamental ways in which venture capital supports startups:
- Market expertise: Venture capitalists are experts in their fields. They enter as investors only after they have made enough money and a name for themselves in their sectors. Thus while a startup founder is focused only on his business, a venture capitalist provides the much-needed industry insights including international markets, new client base, and potential exit scenarios.
- Streamlined approach: Since venture capital funding is time-bound and spans over 4- 6 years, they operate with utmost precision. They enable the startup team to streamline all communications and formulate strategies and practical direction for the company. Investors also help inculcate best practices in governance, financial control, reporting, business ethics, contracts, and procedures.
- Support services: Many a time a startup does not manage to set up all the necessary wings for a business to thrive. With limited funds and too much to achieve, priorities need to be set. The venture capital firm in this case provides additional support services. Since a typical venture capital firm maintains their marketing, legal, recruitment teams, these services are extended to the funded startup as well.
- Network: Venture capital funding ultimately leads the startup into an IPO or acquisition. Thus the new business must have a proper direction. Venture capital firms prove to be a great help in these scenarios. The combined industry contacts of the investors introduce the startup to new investors/ clients and large corporate with acquisition capabilities.
How does VC funding work?
Venture capitalists seldom operate alone. Since the stakes are high, HNIs and institutional investors (investment banks, insurance companies, pension funds, or other financial institutions) alike, pool in their funds and operate as a one venture capital firm where each one is a Limited Partner (LP). A typical venture capital funding process involves the following steps:
- Submit business plan: The first step to approach venture capital funding is to submit an impressive business plan. Startups must know that almost 90% of proposals get rejected. Thus to cut through the noise, the business proposal must be thorough and well designed to demonstrate the potential of a startup in the best possible ways.
- Due diligence: Since substantial funds are involved, due diligence is crucial. Most VC firms involve research analysts who asses’ proposals and the background of the startup such as their business model, operating history, performance in angel rounds if any, the merit of the prototype, early adopters, etc.
- Investment: Once the VC firm agrees to fund, money is released in phases with set benchmarks to achieve. VC investors acquire a seat on the company board as well. Thus together with the startup management, investors work as a team to maximize profits.
- Exit: A venture capitalist exits after 4- 6 years when the startup has either reached an IPO or acquired by another company. Exit procedures and dates are set at the very beginning during the grant. The rest of the implementation plan is designed accordingly.
Venture capital funding is granted in the following four stages of company growth:
- SEED money $100K – $250K: This is directed towards startups less than a year old and supports formative activities such as prototype development, initial market research, R&D, etc. This stage usually involves less than 15 investors and deals in convertible notes and preferred stock options.
- SERIES A $2 million – $15 million: This is directed towards scaling up activities. The startup must have a market-proven product and demonstrate a promise of progressive revenues within the next 18 months.
- SERIES B $7 million – $20 million: This is directed towards market expansion activities. The startup must have a well marketable product generating substantial revenues. At this stage, the company must be looking at competing with industry leaders and garnering market shares. Usually, investors leading Series A continue to lead Series B and further rounds as well.
- SERIES C $100 million and beyond: Series C is raised when the company is developing more products, expanding in international markets, or acquiring new IP. The next stage is generally the IPO. Investors entering at this stage are usually hedge funds, investment banks, private equity firms, and the likes that can invest in millions and reap exponential benefits.
Top 10 Venture Capital Firms in the USA
|Organization||Number of Investments||Number of Exits||Location|
|Techstars||3,607||380||Boulder, Colorado, United States|
|500 Global||2,864||347||San Francisco, California, United States|
|SOSV||2,414||60||Princeton, New Jersey, United States|
|New Enterprise Associates||2,081||561||Menlo Park, California, United States|
|Accel||1,870||355||Palo Alto, California, United States|
|Sequoia Capital||1,738||354||Menlo Park, California, United States|
|Intel Capital||1,529||474||Santa Clara, California, United States|
|Plug and Play||1,505||148||Sunnyvale, California, United States|
|Kleiner Perkins||1,360||320||Menlo Park, California, United States|
|Andreessen Horowitz||1,294||193||Menlo Park, California, United States|
This comprehensive list was gathered from public data online, mainly from sources like Crunchbase, Pitchbook, and others. This data is for informational purposes only. Should you have any suggestions on updates to this data, you can contact us at email@example.com and we will gladly follow up with you.
Checkout our other comprehensive list of the top 100 VC firms.
Founded in 2006 by David Cohen, Brad Feld, David Brown, and Jared Polis, this is a top-tier startup accelerator and VC firm that has, to date, 3,607 investments. Based in Boulder, Colorado, United States, it provides startups with seed capital, mentorship, access to a network of successful entrepreneurs, and training. The recent investments from this firm include Clinchy, Story Fit, and Hormona. With 380 exits, including big successes like Uber, Yesware, Remitly, and Airfox, Techstars already has a great track record with annual revenue of $11 Million. This, and its long list of close partners and alums, makes it an excellent choice for any startup looking for guidance, investment, and growth. It’s a great choice for new and early-stage startups who need more capital and mentorship to accelerate their plans to get off the ground.
2. 500 Startups
Founded in 2010 by Dave McClure, 500 Startups has made a name for itself as an early-stage VC firm that focuses on helping startups grow. With a total of 2,864 investments, it aims to find promising companies and work with them to accelerate growth by providing best-in-class educational programs, events, and mentorship. Headquartered in San Francisco, California, United States, 500 Startups has offices in Singapore, Istanbul, Bahrain, and other locations. At present, the firm has a total annual revenue of $75 Million and has a track record of success with notable exits of 347 like Animoca Brands, Recurly, Reddit, and more. The latest investments by 500 Startups include AWSt, Fintor, and Earthgen Technology. It is especially good for startups that are in the early stages and are looking for funding and connections. With its focus on technologically oriented startups, this VC firm is a good choice for companies working in the tech and digital industry.
Founded in 1995 by Sean O’Sullivan, this is a Princeton, New Jersey, United States-based VC firm that works with startups that have evolutionary technology, or, as they call it, “ecosystem-changing technologies,” that are shaping the future. This global firm works with businesses across industries by offering multi-stage seed capital and development opportunities. With 2,414 investments, annual revenue of $20 Million, and a current number of 60 exits, including Roadie, Leap Motion, and Motiv this VC firm has already proven its competence. Bizbaz, Unchained Lab, and Fullfily are some of the recent investments by SOSV. The top partners at this firm teach, mentor, and advise companies on a wide variety of topics, from business management to capital allocation, finance, and legal issues.
4. New Enterprise Associates
Founded by Dick Kramlich and Chuck Newhall in 1977, New Enterprise Associates (NEA) is a leading U.S. VC firm based in Menlo Park, California, United States, that helps startups in technology and healthcare with financial and strategic support, access to seasoned entrepreneurs, industry contacts, and much more. NEA has 2,081 investments, 561 exits, and annual revenue of $77 Million. The exits include top companies such as Uber, Snap, and Cloudflare. Backed by a team of experts in governance, marketing and sales strategies, finance, law, human resources and more. The most recent investments are Elion, Wispr, and Merge, thereby making NEA a great choice for startups. It is particularly helpful for startups that require expertise from a wide range of professionals to turn their ideas into a reality.
This is a Palo Alto, California, United States-based VC firm founded by Jim Swartz and Arthur Patterson in 1983. Accel, also known as Accel Partners, is a top-tier VC firm with 1,870 investments and annual revenue of $263 Million. It provides early-stage and growth capital to promising startups and follows a hands-on approach with its portfolio companies. With a total of 355 exits, such as Meta, CrowdStrike, and Razer, from its investments, Accel has proved its efficiency in helping companies grow by providing them with capital and mentorship. The recent investments by Accel include Mason, Merge, and Pillow. Accel operates in other countries as well, including India, China, and London. With intensive support from experienced partners and advisors, Accel is one of the best VC firms for startups.
6. Sequoia Capital
Founded in 1972 by Donald T. Valentine, Sequoia Capital is one of the oldest venture capital firms in Menlo Park, California, United States. The number of investments of the firm has reached a total of 1,738, with a total annual revenue of $192 Million. It has a long list of exits (354), including leading companies like Google, Apple, Uber, and Whatsapp. Sequoia Capital is particularly helpful for startups that are working in the fields of software, healthcare, energy, financial, and mobile startup. The recent investments include Joro, Evy, and Landis, and hence is a top choice for startups that require investment and support. From building the foundation of a billion-dollar startup to investing and nurturing a successful company, Sequoia Capital is a firm with a long list of success stories. Thus, they offer a rounded experience of working with partners, advisors, and the company, while providing financial and strategic support to meet a business’s needs.
7. Intel Capital
Avram Miller, the founder of Intel Capital, started this venture capital firm in 1991. A global VC firm, Intel Capital has its headquarters in Santa Clara, California, United States. With around 1,529 investments in its portfolio and annual revenue of $27.1 Million, Intel Capital has a long list of 474 exits including companies like Razer, Animoca Brands, and Rakuten. Avram Miller is keen on helping startups that are working to transform the future of technology such as cloud, AI infrastructure, cybersecurity, and other such innovative solutions. Yuntian Imagination, Alkymi, and Metalenz are some of the latest investments by Intel Capital. As an experienced firm, Intel Capital provides support to startups in all stages of development, from initial ideas to growth capital. With its experience, mentors, and partnerships within the industry, Intel Capital can be the best investment partner for your tech startup.
8. Plug and Play
With the motto “The world is moving fast and we help you move faster”, Plug and Play is a global VC firm that was founded in 2006 and operates out of Sunnyvale, California, United States. With an annual revenue of $86 Million, Plug and Play have been an active investor. The number of investments it has is 1,505 and its 148 exits include companies such as Honey, FiscalNote, and Life360. Plug and Play invest in startups of all sizes, from early stage to growth stages. With a team of experienced professionals, Plug and Play caters to all needs of startups and can help transform an idea into a successful business. While the most recent investments include Bumpa, Smart Kiwi, and Infiuss. It is one of the top VC firms for startups, as Plug and Play have the right mix of resources and business expertise to assist you in building the right solution for your business.
9 Kleiner Perkins
Founded in 1972 by Thomas Perkins, Eugene Kleiner, Brook Byers, and Frank J. Caufield, Kleiner Perkins is a venture capital firm based in Menlo Park, California, United States. With a list of 1,360 investments and annual revenue of $63 Million, Kleiner Perkins has been involved with startups in the domain of digital, life sciences, and healthcare industries. The latest investments include Welcome, Glean and Subject, and hence is a firm with excellent financial backing and hands-on mentorship. In addition to this, 320 exits include companies like Google, Snap, and Uber, as Kleiner Perkins has a long list of success stories. It is especially helpful for startups that require funding, mentorship, and other similar strategies to help them flourish in the media and tech landscape.
10. Andreessen Horowitz
Launched in 2009, Andreessen Horowitz is a venture capital firm founded by Marc Andreessen and Ben Horowitz. It is a well-known startup VC firm with 1,294 investments and annual revenue of $515 Million. This leading VC firm has an impressive list of 193 exits which includes companies like Lyft, Twitter, and Coinbase. Andreessen Horowitz has a global reach, and thus, they invest in tech-focused startups from all around the world. Some of their recent investments include Odyssey, Apex Space, and The Coterie. As a firm with a strong focus on technology and startups, they look for the latest and quality venture ideas in fields of software, cloud computing, social networks, and other such areas. They have the experience and skills to back up your startup with every aspect you need to succeed.
This comprehensive list is a good starting point for exploring venture capital in the US. However, the basic need while working with venture capital firms is the knowledge of equity distribution. Our expert team at Eqvista can provide you all the assistance required. Eqvista is one of the market leaders in automated equity management software. Explore this section to understand the entire spectrum of our services. For further details reach us today.