Over the past few weeks I've been researching different start-ups and venture capital firms. During my adventures around the datasphere, I ran into a few ideas and notions that piqued my interest. I will highlight two of these in this post.
The first is the basic nature of innovation. It is both essential to the functioning of capitalism and remarkably unprofitable. The reason innovation tends to be unprofitable is because it is much more likely for a given innovation or start-up to fail than to succeed. This led me to consider the futility of the rational, profit-maximizing model in accounting for such a fundamental aspect of capitalism. What then, leads people to innovate? Is it a survival instinct? "Animal spirits"? Risk preferences? This is a basic question that appears to still be largely unanswered.
The second was that venture capital is not all it is cracked up to be. By this I mean, the image of venture capital as a supporter of innovation, start-ups, and the "small guy" does not appear to be all that true. Maybe this was a mistaken notion I had, but my sense is that this is a broader misconception. As this blog post indicates, after years of meagre and negative returns, venture capital now tends to avoid true start-ups and bet more on tested business models and experience. This feels distinctly anti-innovation. By definition, innovation is something that has not been before. This means that the next Google or Facebook will seem like a weird/crazy/idiotic idea now; and that's the point. It's interesting to note that both Google and Facebook were turned down in their attempts to solicit venture capital funding. I would guess that the conservative approach to innovation in venture capital firms is likely tied to the pressure on people making the investment decisions. For example, when the 19 year-old working out of a garage on some outlandish idea you invested in fails, that is tough to explain to the investors who trusted you with their money. With a failed bet on a tried business model run by experienced business men, you can more easily justify your decision. The inherent unprofitability of innovation has probably forced vc firms farther down the innovation chain, which means other sources of funding will remain important.
The first is the basic nature of innovation. It is both essential to the functioning of capitalism and remarkably unprofitable. The reason innovation tends to be unprofitable is because it is much more likely for a given innovation or start-up to fail than to succeed. This led me to consider the futility of the rational, profit-maximizing model in accounting for such a fundamental aspect of capitalism. What then, leads people to innovate? Is it a survival instinct? "Animal spirits"? Risk preferences? This is a basic question that appears to still be largely unanswered.
The second was that venture capital is not all it is cracked up to be. By this I mean, the image of venture capital as a supporter of innovation, start-ups, and the "small guy" does not appear to be all that true. Maybe this was a mistaken notion I had, but my sense is that this is a broader misconception. As this blog post indicates, after years of meagre and negative returns, venture capital now tends to avoid true start-ups and bet more on tested business models and experience. This feels distinctly anti-innovation. By definition, innovation is something that has not been before. This means that the next Google or Facebook will seem like a weird/crazy/idiotic idea now; and that's the point. It's interesting to note that both Google and Facebook were turned down in their attempts to solicit venture capital funding. I would guess that the conservative approach to innovation in venture capital firms is likely tied to the pressure on people making the investment decisions. For example, when the 19 year-old working out of a garage on some outlandish idea you invested in fails, that is tough to explain to the investors who trusted you with their money. With a failed bet on a tried business model run by experienced business men, you can more easily justify your decision. The inherent unprofitability of innovation has probably forced vc firms farther down the innovation chain, which means other sources of funding will remain important.
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