“Venture capital is broken” can mean several things: investors earn disappointing returns, useful technologies go unfunded, too much money pursues similar companies, or managers benefit without delivering enough to their LPs.
Each claim can be examined. Combining them into one verdict makes the argument harder to prove and the remedy harder to choose. A fund can produce attractive financial returns while financing little additional innovation. Another can support important research and still be a poor investment for its LPs.
Decide what a functioning system should deliver
Start by naming the outcome being judged.
| Question | Relevant evidence | What it does not establish |
|---|---|---|
| Did LPs earn an adequate return? | Net cash flows, risk, duration and comparable alternatives | Whether the companies benefited society |
| Did finance enable useful innovation? | Technical or commercial progress attributable to funding | Whether investors captured enough value |
| Were attractive opportunities missed? | Investable rejected cases, their terms and financing needs | That every unfunded proposal deserved capital |
| Were incentives aligned? | Fees, carry, ownership and actual decisions | That one fee structure explains all outcomes |
This separates a financial performance debate from a public-policy debate. Both matter, but they need different evidence.
Take the innovation critique seriously
Josh Lerner and Ramana Nanda's 2020 research review identifies limits to venture capital's contribution to innovation, including the range of technologies suited to institutional venture, concentrated investment influence and governance concerns. The authors also emphasise how much remains unknown about the social welfare effects. Lerner and Nanda, 2020.
That supports asking whether the model leaves valuable work unfunded. It does not establish that every investment in a familiar software category is wasteful or that every technically ambitious project is socially valuable.
Assess what the money changes. Does it fund an experiment that would otherwise not happen, accelerate deployment or simply transfer ownership? Those transactions can have different purposes even when all are described as investment in technology.
Compare opportunities that could actually have been funded
Suppose a fund chooses between two illustrative companies. One needs £5m to test a commercial product over two years. The other needs £80m over eight years before there is a usable installation.
The second project may address a more important problem. It also requires a different financing plan. A £50m fund cannot solve that mismatch merely by becoming more courageous: concentration limits, future funding and its obligations to LPs still matter.
The useful counterfactual asks who could have financed the project, on what terms and with which complementary funding. Grants, customer commitments, specialist equity and later asset finance might serve different stages. Their availability must be established, not assumed.
Calling the opportunity “missed” is strongest when there was a feasible funding structure and a credible return case that decision-makers overlooked.
Examine incentives through decisions
It is reasonable to question whether a manager's economics encourage fund growth beyond the opportunity set. Test that proposition against behaviour.
As the fund grew, did cheque sizes increase because companies required more capital, or because the manager needed to deploy a larger pool? Did the strategy change? Did staffing and portfolio support keep pace? What happened to net returns and cash distributions across sufficiently mature vintages?
Those questions are more informative than inferring motives from fee income alone. They also allow an LP to distinguish an intentional strategy expansion from a capacity problem.
Avoid judging a whole system by one market cycle
A weak year for exits can reduce distributions without proving that every earlier investment decision was poor. Conversely, rising private valuations do not establish that the underlying businesses have become more productive.
Use consistent vintages and separate realised proceeds from estimates of remaining value. Examine the concentration of results. If a conclusion changes dramatically when one unusually large outcome is included, explain that sensitivity rather than hiding it in an average.
For the mechanics of assessing performance, see our guide to venture capital returns.
Match the remedy to the failure
An LP facing weak net returns might change manager selection or terms. A promising technology facing an unsuitable funding timetable might need a different capital structure. A concentration of decision-making might call for broader access to investment authority and capital.
The most useful version of the “broken” argument identifies one failure, supplies evidence and proposes a remedy that addresses it. Without that discipline, dissatisfaction with the industry can become a substitute for understanding where the capital should go next.
FAQ
Is venture capital broken?
That conclusion needs a defined test. Poor LP returns, missed innovations, unsuitable financing and concentrated decision-making are different possible failures. Assess the relevant evidence and feasible alternatives. A single disappointing vintage or a large investment in one fashionable sector cannot settle all four questions.
What does financialisation mean in this debate?
It describes concern that growing the capital-management business can become more attractive than improving investment outcomes. Fee income can create that incentive, but the claim needs evidence of actual choices. Examine changes in fund size, strategy, deployment and net performance instead of inferring motives from revenue alone.
Does an important technology automatically deserve VC funding?
Its social value and fit for a venture fund are separate questions. Funding duration, total capital needs and the investor's ability to capture returns matter. A valuable project may require grants, customer finance or another combination of capital that a conventional venture fund cannot provide alone.
Does using an SPV solve incentive problems?
It lets investors choose an identified investment, but it introduces its own fees, conflicts and decision rights. A sponsor can still have incentives that differ from investors'. Assess the economics and governance of the arrangement rather than treating deal-by-deal selection as sufficient alignment.
