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The venture-capital industry has been a vital ingredient in America's recent economic success. But it may have become too big for its own good.

Venture capital allows entrepreneurs to build a firm without having to borrow and pay high interest charges before they generate any revenues. Without venture capital, people with bright ideas would have to go to a risk-averse bank manager, or fight through the bureaucracy of an established firm that may be hostile to innovation. Other things have been essential to success: stable, low-inflation macroeconomic policies; labour markets that make firing and hiring easy; and an entrepreneurial culture in which people work for little or nothing if they have share options. In the USA venture capital deserves a slice of the credit for transforming its economy from the industrial dinosaur of the 1980s into today's high-growth, high-tech animal. Other countries are therefore right to seek to foster venture-capital industries of their own.

Yet as the venture-capital industry gets bigger and more global, more may not always prove merrier. To use the jargon of the new economy, venture capital is not easily "scalable". Traditionally, it has been a cottage industry. Small close-knit partnerships each invested a few million dollars a year, and partners spent much time advising and monitoring managers as they built a firm into a sustainable business that could be sold to investors in the stockmarket. Venture capitalists were often a small "cluster", based in such places as Menlo Park, California. Specialisms and reputations were well-known, so would-be entrepreneurs knew who to go to. Successful partnerships are placing more, bigger bets, and have less time for mentoring and monitoring. And this at a time when problems such as recruiting the right people and managing growth mean that start-ups need support more than ever. The Californian cluster of venture capitalists is now a loose global network.

The boom in venture capital reflects the opportunities created by the Internet. But it also reflects a stockmarket bubble that has been particularly pronounced for initial public offerings. That would mean that much of the money invested in venture capital would continue to be wasted.

Part of the point of venture capital is that, as in Hollywood, many investments yield no returns. Too much investment in innovation is unlikely to be damaging in quite the same way as too many buildings or factories. Yet the venture-capital industry has thrived partly as a disciplined risk-taking process that put as much emphasis on managing as on financing. The wrong lesson for other countries to draw from its success is that, if you simply throw enough money at new ideas, it will stick. That was the approach taken by investors in boo.com, the European sports-goods e-retailer that went bust after frittering away $135171. Too much fertiliser can sometimes be as bad for a plant as too little.

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