Venture capital (VC) has funded some of the most valuable innovations of the last half-century—search engines, electric cars, mRNA vaccines. But in recent years, VCs have clustered their investments into a few technology trends—first social media, then crypto, and now AI. The conventional wisdom is that VCs simply pick the most promising pitches they get. On that view, ideas drive funding. In this Article, we argue that funding drives ideas. VCs send signals to the market about which technologies and business models they will fund, and those signals induce entrepreneurs to found startups that suit the VCs’ preferences. The ideas that VCs are willing to fund are not the most socially—or even economically—valuable. Their preferences are shaped by social norms, power law returns, and limited time horizons. The net result is a narrowing of innovation. Drawing from eight years of qualitative research, we develop a model that explains how VCs influence founder behavior. We explain how that influence affects innovation, efficiency, and equity in entrepreneurial ecosystems and consider potential interventions to expand the possibilities for innovation. 

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