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Paper short abstract

The paper reflects on the relationships between loopholes and residual categories using a case study from the history of venture capital in the U.S. It traces the evolution of the category 'special situations' investment and its influence on the emergence of venture capital industry.

Paper long abstract

Loopholes are integral to socio-technical systems; residuals are integral to the ‘actually-existing’ classification systems (Bowker & Star 2000; Star & Bowker 2007). Both can be conducive to ‘gaming’ practices, as well as to innovation. Both have a definite lifecycle: once spotted, loopholes tend to close, as fools rush in, metrics change, inventions get copied. Similarly, residuals sometimes become ‘thicker’ in content and move closer to the ‘core’ of the classification in question (Eyal 2013). This paper compares loopholes and residuals by way of a case study from the early history of venture capital in the U.S. During its formative period, practitioners called venture capital investment ‘special situations.’ In so doing, they were using a residual category of security analysis, a profession whose categories dominated American finance at the time (Zhikharevich 2019). Drawing on original archival research, oral history, and published sources, the paper will reconstruct the career of ‘special situations’ in the history of American finance. First, it will show how ‘special situations’ evolved from a residual category at the margins of security analysis into the center of a dedicated investment strategy aligned with the emergence of ‘Space Age’ technological companies. Second, it will demonstrate how junior security analysts working in institutional finance used ‘special situations’ to describe the emerging opportunities in high-tech companies to their superiors, providing legibility and legitimation to the nascent venture capital industry. Third, it will leverage the historical case study to reflect on how residuals can become loopholes and vice versa.