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Social network is a dominant， distinguishing characteristic of Silicon Valley. Becauseinnovation entailscoping with a high degree of uncertainty， such innovation is particularly.

In 1946 Ralph E. Flanders， then president of the Federal Reserve Bank of Boston， and Harvard Business School professor Georges Doriot launched the first venture capital firm ARD. Moreover， the goal of ARD (American Research Development) was to create a private and independent entity that could transform technological research into profitable enterprise — withoutgovernmentsupport. After the creation of ARD， many new venture capital firms joinedtheindustry making it one of the most important industries of the 20th century. New technologies were discovered， new jobs were created， and more tax revenue was generated.

The private gains from venture capital should be quite clear. With considerable risk accompanying venture capital， there are equal and often greater profits to be made. Following a near shutdown between 1970 and 1977， venture capital has bounced back to become a $30+ billion industry in the United States alone. Furthermore， investment in highly innovative technology ventures requires less capital than investing in non-innovative low-technology ventures. In fact， highly innovated technology ventures require 26% less capital. In addition to requiring less capital to get started， highly innovative technology ventures require less capital to operate. Compared to Fortune 500 companies， venture-backed companies only require $42，914 per new job while Fortune 500 companies on average require $59，510 per new job. The smaller startup capital requirements combined with smaller overhead costs are two key reasons why venture capital can be so profitable.

Moreover， venture capital not only profits investors， but it profits society as well. The impact venture capital has had on society can be broken up into two parts: visible impacts and imperceptible impacts. There are a number of examples that can be included with visible impacts; however， there are two examples which make an especially strong point. The first impact is industry creation. Investors have served as catalysts in the formation and commercialization of entirely new industries: personal computers ， cellularcommunications ，microcomputer software， biotechnology， and overnight delivery， to name a few. The creation of new products and services has benefited society greatly by affording us greater convenience and efficiency. A second visible impact of venture capital is job creation. According to a survey， 235 of 1，650 companies responded that they created nearly 36，000 new jobs. This is an amazing number especially when considering that they same 235 companies also generated $786 million in export sales， $726 million in research-and-development， and $170 million in corporate tax payments. All together， the social impact of capital venture is extremely noticeable.

Venture investing is risky when considered from the perspective of individual investments， but the risk is mitigated by the fact that a venture capital partnership invests in a large number of firms．The venture capitalist's dilemma is to balance between errors of omission， not investing when one should， and errors of commission，investing when one should not. A rule of thumb is that for every ten investments，three are complete losses；another three or four neither succeed nor fail， from which it is difficult to extract the original investment; another two or three return three or more times the initial investment;and one or， perhaps， two investments return more than ten times the initial investment．In effect， the gains from the home runs cover all losses. The larger the number of quality investments， the greater the possibility of funding one of the home runs. Frequently， the greatest successes are those in which the market growth is unforeseen by other investors， because， if success can be foreseen， the true value of the firm can be judged and a correct valuation can be placed upon the opportunity. Of course， it is also true that those foreseeing the future have a substantial probability of failure.

Silicon Valley is the prime center of venture capital activity in the United States. Over one-third of the nation's largest venture capital companies have an office located in or near Silicon Valley. Many of the remaining venture firms， although based elsewhere， are heavily involved in Silicon Valley. Venture capital goes hand-in-hand with entrepreneurship and one cannot understand a high-tech system like Silicon Valley without understanding how venture capitalists operate.

Venture capitalists are powerful gatekeepers， deciding whether or not a new start-up will go. But venture capitalists do much more， providing management assistance and technical advice throughout the early stages of a company's growth. In some cases， they may even fire the company president and take over the firm until a new leader can be found. Yet they tend to shun publicity and remain a shadowy and often misunderstood entity to the public. Many Americans do not even know that venture capitalists exist， and few recognize their power in directing technological innovation.

Silicon Valley played a critical role in the evolution of the modern venture capital system， and， conversely， the local venture capital community contributed to the making of Silicon Valley. Venture capital in Silicon Valley grew by a process of combination，division， and incessant networking. Successful enterprises gave rise to wealthy entrepreneurs who would become venture capitalists， and existing venture capital funds gave rise to new venture funds in a virtuous cycle of investment， growth， and capital accumulation. In this sense， venture capital in Silicon Valley developed far more organically than did a similar community in Boston， where financial institutions and the strategic efforts of key elites played an important formative role.

Silicon Valley venture capitalists adapted and perfected what is arguably the single most important organizational innovation of the modern venture capital system—the limited partnership model. Lacking a substantial base of finance capital like New York， Boston， or Chicago， Silicon Valley venture capitalists use the limited partnership as a vehicle to mobilize funds from institutional investors， while providing the opportunity for the venture capitalists to benefit handsomely from their successes through the carried interest provision.

In contrast to venture capital in all other regions， Silicon Valley is unique in the fact that local venture capitalists invest the bulk of their funds locally and have few extra regional offices. In fact， venture capitalists based in other regions felt compelled to open offices in Silicon Valley. This reflects the fact that Silicon Valley can generate the demand for venture capital.

Venture capital evolved with Silicon Valley's technology base， drawing from it and nurturing it by providing the funds for new initiatives. In this process it became integral to the entire region's dynamism and fueled the creation of an economy based on new firm formation. Effectively， the investment successes created both the wealth and the opportunity for the emergence of technology—oriented investing apart from traditional financial institutions.

The rise of venture capital in Silicon Valley provides a clear and important illustration of the relationship between venture capital and the broader process of technological innovation and regional industrialization. Venture capital in Silicon Valley was not created out of whole cloth; rather it evolved gradually as an element of the endogenous growth of the region.