Frogs and princes

WHO ARE the heirs of Robert Fleming, the 19th-century Scot who saw that America was the coming place to put risk capital? The venture capitalists of Silicon Valley have the best claim. The businesses that loom largest in public equity markets—Amazon, Apple, Facebook, Google, Tesla and the rest—were nurtured by VCs. Venture-backed companies account for around a fifth of the market capitalisation of public companies in America and almost half their research spending. The funds that unearth such gems stand to make pots of money. VCs have on average (an important qualifier) beaten the public market net of fees over the long run.

Most firms that receive VC funding fail. But the winner-takes-all nature of technology markets means those that succeed often do so extravagantly. The VC industry is at the frontier of capital allocation. The typical investor has to kiss a lot of frogs to find a prince (or even a decent-looking frog). The average VC firm screens 200 targets, but makes only four investments, according to a study in the Journal of Financial Economics. Part of the added value, say its authors, is to improve the governance of startups and keep a watchful eye on management.

No wonder pension schemes, sovereign-wealth funds and mutual funds are competing to write big cheques for Silicon Valley’s...