Not strictly true in this case - an essential factor in the success of a venture-backed startup is the ability to secure a next round of funding.

This exacerbates biases significantly, because you're not only trying to select for success, but also for next-round fundability. So it makes perfect sense to say "I think you're a great founder with a great idea and fantastic prototype. _I'm_ not prejudiced, but I think other VCs are too biased for you to be successful, so I won't invest."

I've heard this multiple times personally, to the point that I've been advised to bring in a more traditional CTO and take a VPEng/CSO role.

Systemic inefficiencies like this one usually require regulatory or systemic assistance to reach a new, more profitable, equilibrium.