Role of biz and VCs in innovations
Have seen 2005 reflection on VCs being not technology-oriented enough http://spectrum.ieee.org/computing/hardware/how-venture-capital-thwarts-innovation
My core thoughts:
- Dichotomy of VCs being anti-technology innovators is a little bit too strong:
(1) VCs serve private capital, not public. VCs fund businesses, not research. Businesses penetrate innovations, not creating them. VCs evaluate PENETRABILITY of some tech BY SPECIFIC TEAM IN SPECIFIC TIME.
A) Public funding funds basic research and sometimes applied research. For public expenditures, it is hyper rational to make longer bets and also to destroy capital towards some directions just to check these directions. (I have personal questions to the efficiency of the science/technology progress, but it doesn’t matter here).
B) Corporations sometimes do applied research and mostly do engineering + entire value chain towards penetration.
C) Sometimes startups indeed often penetrate faster than big corps (“incentives generate behavior”/bureaucracies/”innovator’s dilemma” all that stuff). VCs support startups, not big co’s.
(2) Non-engineering degrees of VCs reflects different focus of VCs as a service company to tiny (at first) businesses. Possible comparison: You don’t blame doctors for not being molecular biologists vs. their drug researchers counterparties = different goals, different skills. Doctors cure specific people, drug researchers find cures.
(3) If you insist on more technology risk taking by VCs — I can imagine some solely public-funded VC fund — this fund can be more radical and seek technology risks. But it should also not be punished after fund 1. So, public LPs should commit either for a few funds since fund 1 or make it 10 years investment cycle for fund 1.
Less importnat thoughts:
- I do not fully understand how they define technically innovative or less technically innovative. BTW for me more innovative innovations mean more capital intensive process both at (a) research and (b) production stages. So, that’s why part of innovation is done inside apple, ibm and alike = less expected return, higher capital requirements as barriers etc.
- An idea that only on Series C there is scalable revenue is clearly very different from how it is done now, right?
- Funds had 6–7 years span, not 10 years by default as now?
- The need to jump from fund 1 to fund 2 in 2–3 years before you see results of fund 1 I agree. Now you show increases of portfolio valuation and some exits also? Now exits happen faster?
- PhDs vs. serial entrepreneurs: serial entrepreneurs clearly learn something along the way — there were stats that serial founders show success rate 20–30–40%. Compare it to 5% for first-timers now (and 10% success rate for first-timers decade ago).
- Corvis did IPO in July 2000. $11B market capitalization disappeared. But Amazon IPOed in 1997 at $16 per share, in 2000 it was $90, in 2001–2002 $5–20. Today it is $830 per share (to IPO +55,000% = 55x in nominal terms).