Yeah, yeah, I know. John Doerr is working on his next billion-dollar hit. The same goes for Michael Moritz, Vinod Khosla and the rest of the Sand Hill Road gang. And we remain awed by, and envious of, the fortunes of Jobs, Page, Brin, Omidyar and their ilk.

But beneath all the glitter, venture-capital financing as practiced today in the U.S. is a broken model. Worse, thousands of companies that deserve funding aren't getting it.

In pictures:
Ten elements of a sound business plan
Trends that VCs want to fund

Venture capital has become a lottery system where a few make unbelievable fortunes (typically by investing in technology companies) while the rest lose someone else's fortune. To wit: From 1997 to 2001, just 4 per cent of all VC companies reaped over 65 per cent of the rewards when companies they backed sold shares to the public.

Timing is everything in the venture capital game. For the five-year period ending Dec. 31, 2000 (encapsulating much of the tech boom), VC funds averaged 48 per cent annualised returns, according to Venture Economics. Compare that with the five years leading up to Dec. 31, 2005, during which VCs managed to destroy wealth at a 6.8 per cent clip.

The reason for this lumpy performance is manifest: To earn their keep, VCs need a few walloping successes to pay for the preponderance of failures--perhaps eight out of every 10 investments--in their portfolios.

In pictures:
Is your great idea a real business?
Cool technologies getting millions

Consider that, on average, 4,130 companies were backed annually by VC money between 1997 and 2004, according to figures compiled by PricewaterhouseCoopers, Venture Economics and the National Venture Capital Association. If 2 per cent are 'home runs' (defined as projects with annual returns of 100 per cent and up), then we're talking about a meager 83 home runs a year.

Think about it: That means an enormous percentage of the 1,200 VC funds (even assuming some collaboration) are losing their shirts--let alone clearing those 20 pre cent hurdle rates demanded by investors to justify the risk. Indeed, the actual average return for early-stage VC funds during the 20-year periods ending between 1999 and 2005 was 17.3 per cent.

Why should we care? Simply because while the 'smart money' is busy chasing huge hits, less sexy but perfectly viable ventures are getting ignored.

In pictures:
Think you could be a venture capitalist?
The most powerful women in venture capital

The fact is, there are few, if any, organized financing sources offering under $1 million of equity for companies that are likely to become profitable mid-sized businesses. Most of these businesses scrimp and save; tap friends and family members, or maybe small angel investors; and borrow the rest from banks and other sources such as leasing outfits or usurious credit card companies. Debt and leases need to be repaid, putting a strain on cash.

There is a solution: a new 'sustainable equity fund' to finance what I call mid-potential ventures.

Mid-potential ventures become mid-sized businesses--those with 10 to 500 employees. These businesses are the biggest job creators in the US, estimates the Edward Lowe Foundation, which tracks and encourages entrepreneurship. And unlike their high-potential brethren, mid-potential ventures are more plentiful and not as geographically or chronologically concentrated.

About 4.9 per cent of the 25 million businesses in the US are mid-sized. (Just 0.7% boast at least 500 employees.) Using this same proportion, about 28,000 of the 570,000 start-ups launched in 2002 are likely to become mid-sized; perhaps more could make it that far with attractive financing and expertise. Meanwhile, VC funds financed only 167 start-ups in 2002.

Clearly, while there are a wide variety of financial institutions in the US (mezzanine funds, small business investment companies sponsored by the Small Business Administration, corporate VC funds, community development funds and even microfinance shops), there is a substantial gap in equity financing for mid-potential, early-stage ventures.

A reduced-risk, sustainable equity fund would go a long way toward filling this gap. Based on the model of a VC portfolio (minus the two home runs), returns on such a fund would be in the neighborhood of 10 per cent. If that sounds low, consider that the bottom 75 per cent of VC funds clock average returns of about 5 per cent. (If necessary, these returns can be juiced with tax incentives.)

Such a fund would offer financing and expertise to emerging mid-potential ventures (not just high-potential ventures), anywhere (not just in high-tech areas) and at anytime (not just during tech waves). It could become the first choice of financing and expertise for entrepreneurs developing mid-potential ventures--all while earning reasonable returns for investors and filling the equity gap.

Dileep Rao is the president of InterFinance Corp, which consults with governments, lenders and businesses on venture growth. Rao is also an adjunct professor of entrepreneurship and venture finance at the Carlson School of Management. He holds a doctorate in business administration from the University of Minnesota.