Commercializing innovative technologies in dynamic market settings often involves considerable market and financial risks. With its unique rate of return criteria, equity participation, and value-added capabilities, the U.S. venture capital industry is in a unique position to fund the implementation of aggressive technological developments (Florida and Kenney 1988, Timmons et al. 1983, Fast 1982).
In the early 1980s, technology-related ventures accounted for as much as 70 percent of the companies financed and often more than 80 percent of the total dollars invested in any given year. Yet the availability of venture capital does not automatically generate the climate under which technology development can flourish (Sapienza and Timmons 1989). In addition to funding, one of the primary advantages to obtaining venture capital has been to gain access to the venture capitalist and the link he or she provides to scarce and valuable resources (Timmons and Bygrave 1986, Florida and Kenney 1988). Questions concerning the "value" of these value-added services have been expressed by Gorman and Sahlman (1986) and MacMillan et al. (1988). Nevertheless, Florida and Kenney (1988, 312) maintain that venture capital plays a unique role in the evolution of what they term the "social structure of innovation":
The growth of technology venturing then proceeded along a learning curve characterized by the gradual accumulation of investment and management skills on the part of venture capitalists and entrepreneurs alike. This in turn facilitated the development of extended entrepreneurial networks that became conduits for sharing information, making deals, and mobilizing resources. As a central component of such networks, venture capital thus played an important role in incubating entrepreneurial activity, attracting entrepreneurs, and accelerating the rate of new business formation.
GROWTH AND CHANGE IN THE VENTURE CAPITAL INDUSTRY
The venture capital industry has changed considerably in the last decade. Between 1978 and 1987, the industry experienced (1) nearly an 800 percent increase in total capital under management, from $3.5 billion to $31.1 billion; (2) a 700 percent increase in annual capital commitments, from $600 million to $4.9 billion; and (3) nearly a 600 percent increase in annual disbursements, from $550 million to $3.8 billion (National Venture Capital Association's 1988 Annual Report). Though disbursements have declined since 1987, total capital under management has continued to increase. This phenomenal growth has netted the following changes in the structure and investment philosophy of the industry:
* increasing size and number of venture capital funds (Venture Capital Journal 1982-1989)
* increasing competition among venture capitalists and declining rates of return (Bygrave et al. 1989)
* fewer experienced investment personnel (National Venture Capital Association's 1988 Annual Report)
* increasing size of average investment (Robinson 1987)
* increasing amount of co-investment (Bygrave 1987, Gupta and Sapienza 1988)
* increasing specialization (Robinson 1987, Gupta and Sapienza 1988).
Despite the venture capital industry's substantial contribution to technological development, research suggests that the investment focus is shifting away from the development of high-technology firms. Researchers and practitioners alike have expressed concern that this trend will limit available risk capital to fund new entrepreneurial and small business growth in technology markets. As Timmons and Bygrave (1986, 174) note:
How can technological innovation be encouraged if the venture capital community is unable or unwilling to contribute so disproportionately to the funding of new innovations as it has in the past?
Research has suggested that venture capital activity directs entrepreneurs and investors towards areas of future economic and social growth (Florida and Kenney 1988, Fast 1982, Timmons and Bygrave 1986) and is essential to the continued competitiveness of U. …