We spend most of our diligence conversations asking a founder to justify their own numbers. It's worth turning that same scrutiny on the industry writing the checks. Venture capital likes to think of itself as a permanent, rational allocator of capital to the best ideas. The industry's own history says otherwise -- and the pattern in that history is still live in every fund's portfolio construction today.
Before 1978, venture capital was a boutique activity, not an industry with its own gravity. Real new money committed to US venture funds, adjusted for inflation, was about $68 million in 1977. Two decisions, neither made by a venture capitalist, changed that in eighteen months. The 1978 Revenue Act cut the capital gains rate from 49.5% to 28%. Then in 1979 the Department of Labor clarified that a small allocation to venture capital didn't violate ERISA's "prudent man" fiduciary standard, as long as the overall pension portfolio stayed diversified. That single regulatory reading is what let pension funds into venture capital at scale for the first time -- and pension funds became the industry's dominant capital source within a few years.
The effect was immediate: committed capital went from that $68 million floor in 1977 to $978 million in 1978, then climbed to roughly $5.1 billion by 1983. Assets under management tracked the same climb, from $4.5 billion in 1980 to $29 billion by 1987. And 1983 was the peak on both ends of the pipeline at once -- the year money went in fastest was also the year venture-backed IPOs peaked, 116 to 121 of them, roughly $14 billion in IPO-year market value.
Then the 1987 crash shut the exit window. Venture-backed IPOs fell to 32, then 40, then 42 a year through 1988-1990, even as the capital pool kept growing, from $12 billion in 1983 to $31 billion in 1988. More capital chasing fewer exits is what broke the funds that raised at the 1983-85 peak -- median fund IRR fell from roughly 30% in 1982-83 to about 8% by 1988. The lesson isn't "venture capital boomed in the 1980s." It's that a policy shift can open a capital spigot years before anyone can tell whether the money going in will find a real exit -- and the gap between the two, three to eight years in that cycle, is where funds actually win or lose.
The same disconnect shows up again, on a different axis, once the industry had scale. In July 2011, Peter Thiel's firm Founders Fund published a manifesto that became famous for one line: "We wanted flying cars, instead we got 140 characters" -- his complaint that venture capital had stopped funding ambitious, capital-intensive, physical technology and settled for funding "features, widgets, irrelevances." Three weeks later, Marc Andreessen published the opposite argument in the Wall Street Journal, "Why Software Is Eating the World." Both were right about something real, just not the same thing. By PitchBook's own count, from 2000 through roughly the last few years, venture dollars flowed into software companies at about 3x the rate they flowed into hardware -- Andreessen's read on where the money and the restructuring both were. But by the 2000s, 90% of the top 10 most valuable venture-backed companies made software -- Thiel's complaint had real numbers behind it too. They were answering different questions about the same pool of capital: which sector gets the most dollars, and which sector's few outsized bets produce the companies everyone remembers, aren't the same measurement.
What neither of them could have predicted is that the pendulum would swing back. Deep tech's share of global VC funding was roughly 12% in 2016; by 2026 it had climbed to 36%, nearly a threefold increase in a decade, per venture firm Celesta's own portfolio research. The count of hardware-focused firms in the top 10 most valuable venture-backed private US companies went from essentially zero in the 2000s to four today.
The through-line across both cycles is the same: capital moves on a policy or narrative shift well before the market has told anyone whether that shift was the right one, and the gap between the move and the verdict is measured in years, not quarters. Whatever thesis is currently winning fundraising conversations -- and there's always one -- deserves the same question we'd ask a founder's growth projection: is this a real, durable shift in what creates value, or is it capital that arrived early and is still waiting to find out.
Sources and further reading: "The Return of Venture Capital" (historyofcomputercommunications.info) on the 1978 Revenue Act and the industry's early capital growth · Gompers, P. (1999), "An Examination of Convertible Securities in Venture Capital Investments" (NBER Working Paper), on the ERISA prudent-man rule · Business Insider on Founders Fund's 2011 manifesto · Andreessen, M., "Why Software Is Eating the World" (Wall Street Journal, Aug. 20, 2011) · MaC Venture Capital, "The State of Technology & Culture: A Return to Hard Tech" (2025) · Celesta VC, "Inside Deep Tech Market" (2026). A longer version of this piece, with the full historical arc, runs on our research site: "Why venture capital wasn't always an industry" and "Flying cars vs. 140 characters".