What the enthusiasm for funding startups means for the VC world

FINANCIAL MARKETSVCVC are fuelled by stories, and the most skilful storytellers are found in venture capital. For a start, venture capitalists have to listen to a lot of fairy tales from the would-be entrepreneur. “The world will look different in a decade,” he says. “My startup will be the leading business in a new industry.” s tell themselves stories about how they can foresee what others cannot, and how this stands to make them a lot of money. And they retell them to potential investors in their funds.Who to believe, when you cannot easily verify such tales? This difficulty is a version of the agency problem of asset management. When venture capital was clubbier, it was manageable. But in recent years investors who are new to the terrain have been piling in. A trying to raise money may favour startups of the kind that has done well recently, even if they are not the best long-term bet. Oddball startups with more potential might then be starved of capital.