Venture Capital Is Ripe for Disruption

It’s time to develop new sources of capital for founders to help them solve their customer problems and avoid venture capital’s massive failure rate

The venture capital world that funds the technology ecosystem appears to be specially designed to back the best founders working on the economy’s most important problems. In reality, the financing structures we use were designed more than 150 years ago for whaling missions, and the funds and how they work have been constantly evolving since their inception around 1860.

This evolution is in many ways a strength—by definition, it is built on the successes of the past, but it leaves our ecosystem more blind than we realize. We could fear the fragility this engenders but should instead see it as an opportunity to reach beyond its artificial limitations, to solve hidden or devalued problems. Technology funding’s demonstrated ability to change should give us confidence that we can stretch it further, clearing new paths to success.

Wikipedia covers the history of venture capital better than I could, but it’s worth highlighting key epochs. The system as we know it was birthed by the windfalls from early funding wins, including DEC and Fairchild Semiconductor, so by definition there was no technology funding system in place at that point. Every deal involved people flying around the United States, collecting enough money from rich people to back a new venture.

These early big successes motivated a few people in western states to set up firms dedicated to funding technology companies — prior to this, the vast majority of American capital was in New York. Within a couple decades, partially enabled by some regulatory changes in the United States, there were enough firms around (including modern-day heavy hitters like Sequoia and Kleiner Perkins) that we had what felt like the first stable system. Capital managed by VC firms grew from $3 billion to more than $30 billion in the 1980s, and those watching the current market will not be surprised to hear that this led to overinvestment and then a crash, when the public markets crashed in 1987.

What survived went on to fund the internet boom in the 1990s, when a huge amount of…