Vladimir Lenin believed that a tiny vanguard could, through force of will, harness historical forces to transform how global capitalism works. He was right. However, the revolutionaries have not been bearded Bolsheviks but a few thousand investors, mostly based in Silicon Valley, running less than 2% of the world’s institutional assets. In the past five decades, the venture-capital (vc) industry has funded enterprising ideas that have gone on to transform global business and the world economy. Seven of the world’s ten largest firms were vc-backed. vc money has financed the companies behind search engines, iPhones, electric cars and mrna vaccines.
Now capitalism’s dream machine is itself being scaled up and transformed, as an unprecedented $450bn of fresh cash floods into the vc scene. This turbocharging of the venture world brings significant risks, from egomaniacal founders torching cash to pension pots being squandered on overvalued startups. But in the long run it also promises to make the industry more global, to funnel risk capital into a wider range of industries, and to make vc more accessible to ordinary investors. A larger pool of capital chasing a bigger universe of ideas will boost competition, and is likely to boost innovation, leading to a more dynamic form of capitalism.
The vc scene has its roots in the 1960s and has been a misfit in the financial world. In contrast to Wall Street’s suits, sophistication and Hamptons mansions, it prefers fleeces, nerdiness and Californian villas. Its distinctiveness is also a matter of intellectual emphasis. As mainstream finance has grown bigger, more quantitative and more preoccupied with slicing and dicing the cashflows of mature firms and assets, vc has remained a cottage industry that cuts against the grain, seeking to find and finance entrepreneurs who are too callow or strange to sit in a room with staid bankers, and ideas that are too novel for mbas to capture in financial models.
The results have been striking. Despite investing relatively modest amounts over the decades, America’s vc funds have seeded firms that are today worth at least $18trn of the total public market.
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