Venture Capital and “Innovation”

Many have recently been critical of the role of the venture industry in financing “true innovation.” The narrative goes something like this: “VCs are like lemmings, flocking to the latest consumer wave (mobile chat, ride-sharing, etc.) in search of explosive short-term hits. This is not how the venture industry is supposed to operate.” This story line is further reinforced by the extreme pain felt by high-profile clean-tech investors, causing the burned to rotate away from an area of hard-science believed to be essential for the future of our planet. I mean, if VCs won’t fund these companies, then who will? Or perhaps the better question is, who should? And come to think of it, is there really only one kind of innovation, that which results in the development of a new compound or a new technology?

When it comes to breakthroughs in long time-scale, massively capital intensive areas in the hard-sciences, e.g., battery technology and solar technology writ large, I’d posit that the right source of financing for this kind of innovation is either the Government or large corporations. Why (relatively) small, private partnerships are expected to invest in generational ground-breaking science is beyond me. If you are a Limited Partner in such a fund, and the cost of commercializing one of these technologies is several hundred million dollars or more, with the possibility of the result being -0- within the stated time horizon of the fund, how could this rationally be an investment worth making? While large funds, e.g., $1-2 billion funds, have sought to underwrite these risks, even this is a paltry sum when attempting to develop a technology that is nascent and unproven relative to entrenched, well-funded and efficient incumbents. These bets have often ended in tears.

So what about VC investing in “innovation?” I’d argue that VCs have financed tremendous innovation that has either a heavy technology component or a novel business model that disrupts established players, e.g., Dropbox, Box, MongoDB, Square, Airbnb, and many others including Google, Facebook and Twitter. These companies are helping to make the world better, regardless of the fact that none of them involves cracking the atom or developing a new solar cell that changes the cost/benefit dynamics non-carbon based energy.

Does innovation need to equate to hard science? I think not. There are tremendous breakthroughs that can and have been made with a fraction of the funds required to put a man on the Moon, harness nuclear fission, or to develop transformative battery technologies to change how people interact with their devices and modes of transportation. Certain technologies can impact a broad swath of society but require the patient, well of capital that is simply beyond the means of private venture partnerships. These are closer to public goods and best financed by either Government agencies or large corporations with generational time horizons. Once the fundamental breakthroughs have been established, the venture community is well-suited to help commercialize and distribute the impact of disruptive technologies. But for the venture industry to be labeled as ineffective or unfairly risk-averse by not backing such initiatives simply isn’t fair. Innovation has many forms, and different market participants are better equipped to tackle certain kinds of innovation based upon their bankroll, their timeline and their mission.