Money  /  Book Review

Full Metal Racket

A history sheds light on venture capital’s ties to the military-industrial complex.
AP Photo/Jeff Chiu

The aim of venture capital is to bet on the long tail: Invest in many different start-ups, knowing most will fail but hoping at least one big success will more than offset the losses. For this reason, the business has always been focused on technology companies, which offer the greatest potential for fast growth and outsize returns. Most venture capital firms today are located in Silicon Valley, and nearly all the major tech companies, including Amazon, Apple, and Google, relied on venture capital funding to get off the ground. The playbook is simple: Raise capital from institutional investors such as pension funds and university endowments, buy an equity stake in young companies, and then oversee their operations until they go public and investors can cash out.

Tom Nicholas’s VC is a celebratory history of the evolution of the venture capital firm. The book opens with the industry’s origins in a uniquely American tradition of financial risk-taking that began in the early nineteenth century. It closes with praise for the “social value” the industry generates by sponsoring technological innovation. But the history Nicholas tells is not a simple story about smart investors betting on even smarter entrepreneurs and being rewarded by the market for their foresight. His account also shows how much the rise of venture capital has depended on the close relationship it developed with the American state: winning more and more privileges and concessions from it—tax breaks, cheap loans, and deregulation—while benefiting from government spending on research and the military’s insatiable desire for new weapons of war.

Wealthy individuals and families have always made investments in risky commercial ventures. But it was not until the 1940s, and only in America, that long-shot business ideas began to be funded by firms devoted to this purpose—ones that could tap not only personal and family riches, but also larger sources of income squirreled away in trusts and insurance funds. The first venture capital firm, the American Research and Development Corporation (ARD), was founded in 1946 by a group of Boston-area industrialists, financiers, and academics eager to profit from the new technologies developed for the war effort and worried that the onerous tax and regulatory strictures of the New Deal state were strangling entrepreneurial activity.