Shift to Small Firms: The 1980s saw a structural shift in the American economy, with small firms (fewer than 100 employees) creating 16 million new jobs while large firms lost 4 million jobs. ERISA Rule Change: The 1979 Employee Retirement Income Security Act (ERISA) rule change allowed pension funds to invest in venture capital, significantly increasing the flow of money into the venture capital sector. Increased Venture Capital: Following the ERISA rule change, annual contributions to venture capital funds rose dramatically from $100-200 million during the 1970s to over $4 billion by the end of the 1980s. Impact of Overinvestment: The influx of capital led to overinvestment in certain industries, premature market entries by firms, and deteriorated monitoring of entrepreneurial projects. Role of Venture Capitalists: Venture capitalists not only provided funding but also actively monitored and supported the firms they invested in, often sitting on boards and guiding management decisions. Historical Development : The roots of modern venture capital can be traced back to the late 19th and early 20th centuries, with significant contributions from wealthy families and the formation of the first venture capital firms like American Research and Development (ARD) in 1946. Shift to Later-Stage Investments: With the institutionalization of venture capital, there was a shift towards later-stage investments and leveraged buyouts (LBOs), reducing the focus on early-stage seed and start-up financing. Herd Mentality: The large influx of money led to a herd mentality among venture capitalists, resulting in overinvestment in specific industries, such as the Winchester disk drive industry, which eventually led to market crashes. Grandstanding: Inexperienced venture capitalists often rushed to bring firms to the public market to build their track record, which sometimes resulted in suboptimal returns. Declining Returns: The structural and behavioral changes in the venture capital industry led to a decline in median returns from a peak of 31% in 1982 to only 8% by 1989

This article is crucial for understanding the historical dynamics and structural changes in the venture capital industry in the U.S. from the late 19th century through the 1980s. It provides critical insights into how regulatory changes , such as the ERISA rule amendment, influenced the flow of capital into venture capital and shaped the industry's development. The article also addresses the consequences of the rapid influx of institutional money, including overinvestment , shifts in investment focus , and the impact on returns . This information is valuable for economists , historians , policymakers , and anyone interested in the evolution of venture capital and its role in fostering innovation and economic growth .