Decius wrote:
] ] Our methodology was simple. We examined 1303 electronic
] ] high-tech initial public offerings for a 10-year period
] ] ending in 2002. We limited ourselves to IPOs from the New
] ] York Stock Exchange and Nasdaq, which were ground zero
] ] for the telecom and dot-com explosion of the 1990s. We
] ] sorted out those that were VC-funded and compared them
] ] with those that were not. We rated them on a scale of 1
] ] to 5, with 1 being the most technically innovative. [See
] ] sidebar, "Scoring Innovation."]
] ]
] ] We were shocked by what we found. Overall, the level of
] ] innovation during that decade was surprisingly low. Even
] ] more dismaying, it did not correlate well with VC
] ] funding: the level of innovation actually dropped sharply
] ] after 1996, even as venture funding was going through the
] ] roof.

My first reaction to this was one of excitement. Anyone who's dealt with a VC can tell you simply by intuition that they're not true purveyors of innovation, but rather people who are willing to take more risky investments to hopefully generate more return. It's the cult of VC that has turned it into some sort of papacy and spread all kinds of myths and lies about how the process works and what it truly does for the economy. I figured this article might actually put more than intuition into it and come up with some real facts and figures.

But despite having the look and feel of facts and figures, it really doesn't succeed at proving anything other than intuitive sense. While I appreciate the run down of how funds operate from the inside out, what motivates them, and what parameters are they under, none of this is earth shattering news, and none of it was used to construct or defend the argument that VCs don't support or produce innovation.

The only thing that was even close to making that argument was their case of inPhase technologies, which has required many years of R&D funding to generate a prototype product. Great. Fantastic. Probably truly innovative (that's purely subjective btw, even using the author's methodology of evaluation). What they're not telling you is that I'm sure their fund has taken a disproportionately large cut of equity in exchange for this slow burn. So what's the fucking difference? If a VC wants to take 30%+ of your equity in exchange for a return or liquidity event in 2-4 years, then simply burning longer and taking more equity does not make you a better supporter of innovation. If anything, you're not INNOVATING the process of turning research into commerce by doing this. You're just stretching the parameters a bit.

So while I agree passionately about some of the quotes that come from this article ("True innovation requires patient investing rather than the boom-bust mentality we have been seeing from VCs."; "So, of course, the pendulum has swung too far the other way. Since the 2001 telecommunications and Internet depression, even VCs sitting on piles of cash have been afraid to invest."; "This short life cycle for venture funds has dramatic consequences for innovation, none good."), all of which are true and not readily understood by even SEASONED business people, much less the genius PhD engineer - this article falls flat on it's face in offering a solution to the problem. Anyone who went through the telecom scourge in the last 5 years can tell you that INVESTORS (not even limiting it to VCs or anyone else) did not fundamentally understand the dynamics of building out telecommunications infrastructure and the time frames involved. Simply stretching out the time horizon for expectation of returns is not the answer. It is a fundamentally different process that needs to occur. You'd think we'd know that given our history with other big infrastructure projects in the last 100 years (roads, rail, electical, indoor plumbing, interstates, etc) but no. In the end, VCs are not designed to drive innovation. They're designed to drive good returns to their investors, as part of a larger cycle of investment in research and commercialization. A rising tide floats all boats, only one of which is a VC and not a very big one at that.

So the authors miss on proving that innovation doesn't come exclusively from VC funding or the VC process. You could argue that a proportionate amount does, just tempered with the amount of risk they're willing to take (ie EMC, Cisco, Veritas, etc). And the lemming mentality isn't bad. It produces a market driven winner every single time (ie Microsoft over Apple). And to be honest, there are VC's which are very involved in hard research areas such as universitys and national labs. Who do you think FUNDS them? It's not just the government. But real innovation comes from the thinking of taking raw research and applying it for commercial gain. Smart entrepreneurs don't necessarily need VCs or other institutional funding sources to do this work. They just need smarts, patience, perserverance, and hard hard work. The rest will come.

RE: Feature Article: VC doesn't drive innovation.