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New Business Ideas: Venture Capital in America

In most circumstances, free market economies allocate capital through the mechanism of supply and demand. But how does capital get attracted to new ideas, that is, to the development and distribution of products and services that don't yet exist and for which there is, consequently, no demand, no supply, and hence no price? This is a critical question for an economy that wishes to be more than static, and it is the central question for an economy that wishes to lead the world in innovation, efficiency, growth, and power.

When Bill Gates and his team began to mess around with something called Windows, for example, few of us owned computers or could imagine why we might want to. And those few of us who did own them were using DOS and were perfectly happy with it.²⁰ Gates figured that computers were the future, and that if massive numbers of people were going to use computers, something far simpler than DOS had to be developed. He turned out to be right, but he could easily have been wrong. Where did he get his early capital for this odd idea?

The answer is the venture capital industry—in its broadest sense—which has a much longer history in America than is generally supposed. When we think back to the period between about 1870 and 1930, we tend to think of the great Captains of Industry (or, depending on our point of view, the Robber Barons): Carnegie, Morgan, Ford, Rockefeller, and so on. These men accumulated vast fortunes putting ...