Are Venture Capitalists Bad For Innovation? Or Just Bad At Proving Their Point?

Venture Capital

from the headlines-headlines-headlines dept

At the beginning of this article, I was hoping that maybe it was just an April Fool’s joke — but it appears they’re serious. A couple of VCs who are obviously trying to get a lot of attention by saying something controversial have written up an article saying that venture capitalists are bad for innovation. However, about the only thing this article proves is that these particular VCs are bad at proving their claim. While the importance of venture capitalists are often overblown, and there are many VCs who do stupid things or who fit the stereotype of the lemming investor, VCs do serve a very real and very important purpose for those who need that type of capital investment. The biggest problem, often, is that entrepreneurs misunderstand the purpose of venture money or how the VC world works. Most of the article here is really just a rehash of how the VC world works, which has been written up a thousand times already, and most folks with any startup/VC/etc. experience already know quite well. The problem, though, is with the hypothesis and then how they go about proving it. First, they set up the issue by assuming that VCs are an engine for innovation — which is not exactly true. VCs are an engine for building high growth businesses. Those two things are not necessarily the same thing, though, obviously, there can be quite a bit of overlap. However, it’s silly to complain that VCs don’t look to fund longterm innovation instead of looking to fund business opportunities. That’s sort of the definition of venture capital. Then the article gets worse and worse. Not only do they start with the wrong assumption about the relationship between VCs and innovation, they then go on to define innovation in a way that specifically proves their point. They start randomly cutting out companies that they don’t feel are innovative — even when they are, actually incredibly innovative. The problem is that these VCs appear to be confusing innovation with invention. Invention is coming up with a new idea — but very often that new idea is not commercially viable. It’s the innovation on the invention that makes an idea commercially viable, and it’s that commercially viable idea that interests a VC. So, in that regards, it seems like VCs do often fund innovation. They’re not funding new ideas, but how to make new ideas commercially viable. That’s the sort of innovation we should be encouraging anyway. And, of course, the final problem with the article is that they’re looking at the issue in aggregate. There’s no denying that there are some very bad VCs and some very bad VC investments out there — and they may “cancel out” the good ones. It seems odd to condemn the whole space based on this sort of logic.