Venture capital has much to be proud of. In the past fifty years, it has helped build a host of great companies, from Intel and Genentech to Facebook and Google.

In contrast to other new asset classes, it has directly created high-wage, fulfilling jobs. And at least for those who backed the right funds at the right time, it has delivered high returns.

More profoundly, it has played a central role in the build out of ICT, one of history's most dramatic general-purpose technologies.

In the language of innovation researchers, general-purpose technologies are those which, like ICT, electricity or the steam engine, have the potential to transform large parts of our lives and economies.

They take time to bed in, since businesses and industries often need to be rebuilt around them - literally in the case of electricity, which required factories to be redesigned, replacing a single steam driver power plant with multiple electrical machines.

Crackpots, Screwballs and Nutjobs

Working out how these technologies can have their greatest effect requires experimentation.

It also thrives on the efforts of mavericks. As a wise man once remarked "How else does humanity make progress without crackpots, screwballs, and nutjobs, who are willing to do something that's never been done before?"

As Xavier Rolet observed at NESTA's Beyond the Banks event the other day, equity is the best way to back these people.

But it's wrong to think that developing a thriving VC market is the silver bullet to delivering innovation and growth, for three reasons.

It's Easy To Get It Wrong.

HBS professor Josh Lerner has written compellingly on the catalogue of failures that have beset governments trying to create venture capital markets. It is easy to design policies that don't work (consider the UK's Regional Venture Capital Funds, which were sub-scale and performed poorly).

It's also possible to design incentives that are too generous, with the result that investors get involved as much for tax arbitrage as because they believe they can pick tech companies (like the Canadian LSVCCs, detailed on p27 of this NESTA report).

For every Yozma that succeeds in developing a country's VC market, there many schemes that fail.

Innovation Is Not Just About Tech Companies.

We know that the real gains from general purpose technologies like electricity and ICT come not from manufacturing dynamos or laptops, but from changing the rest of the economy to take advantage of them.

This requires not just the kind of small-scale, high-risk investment that VC can deliver but also other equity and debt finance in large quantities.

And significantly, it relies on companies investing their own retained earnings in deploying technology. (It's perhaps no surprise that the Kauffman Foundation found that only 16% of high-growth businesses in the US were VC backed.)

The chart above (all data approximate) shows that most of the cash available for UK companies to invest comes certainly not from VC, or even from equity or loans, but from profits.

Ensuring well functioning debt markets and encouraging companies to invest their large cash piles (currently at a 10-year high and worth about 5% of UK GDP) will play an important role in the transformation.

VC May Not Work So Well Beyond ICT

ICT is just one general purpose technology. Admittedly it's a biggie and probably has much further to go (consider this superb piece by Brian Arthur - £).

But VC's record has been less successful in other sectors. Between 50% and 80% of VC went into IT every year from 1995 to 2008. Biotech and healthcare, the next biggest category, has attracted at most 20-30%, and other categories like green technology are lagging.

With ICT, VC investors find internet businesses with limited technology risk much more investable than "hard tech" plays like the marvellous Lytro, or semiconductor or hardware businesses.

Can VC fund the next general purpose technology?

What Does This All Mean?

Three things: there's a need to think beyond the 10-year model for VC and ask what types of investment models work best at unlocking tech businesses beyond Internet and software.

It means our take on financing innovation needs to look beyond VC to other forms of finance, including debt and growth equity - and to the question of companies' cash balances.

Above all, it means remembering that VC is a complement to rest of the innovation system - not a magic primum mobile.