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Why The Venture Capital Model Is Broken

Financial EfficiencyYeah, yeah, I know. John Doerr is working on his next billion-dollar hit. The same goes for Michael Moritz, Vinod Khosla and the rest of the Sand Hill Road gang. And we remain awed by, and envious of, the fortunes of Jobs, Page, Brin, Omidyar and their ilk.

But beneath all the glitter, venture-capital financing as practiced today in the U.S. is a broken model. Worse, thousands of companies that deserve funding aren’t getting it.

Venture capital has become a lottery system where a few make unbelievable fortunes (typically by investing in technology companies) while the rest lose someone else’s fortune. To wit: From 1997 to 2001, just 4% of all VC companies reaped over 65% of the rewards when companies they backed sold shares to the public.

This article originally appeared on Forbes.com.


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