Why Venture Capitalists Avoid Innovation: They Like Making Money

Any given innovation is much more likely to fail than to succeed. Innovation as a whole may even be unprofitable for the innovators. Fortunately, we keep doing it, because in economic terms, innovations are durable (they last forever) and non-rivalrous (anybody can use them), so over the long term, society benefits a lot from the successful innovations. As a society, we look for ways to get around the fact that innovation is generally unprofitable. We subsidize innovation. We honor it.

A recent conversation has me wondering anew about the question of whether venture capitalists actually further the process of innovation. They claim to be in the business of innovation, but they also talk constantly, often in the same paragraph, about how much they want to avoid innovation.

In this latest conversation, the VC said "We look for companies with a product and a proven business model." This should should sound familiar to you. I wish I could run a video montage of the pictures in my head of VC’s saying how much they want to avoid innovation. Surely you would laugh. If you ask VC’s what they look for, they use words like "traction", "proven business model", "reference customers", and "invest in marketing" or “sales and marketing”. This in itself is a big step forward from "We invest in teams that have done it before" (Greylock partner, 90’s), or "We look for the second time around" (Sigma partner, 90’s). It doesn’t take a genius to understand what they are saying. As much as possible, they want to avoid all innovation (stuff that’s not proven). It’s risky and unprofitable.

by Dharmesh Shah

Full Story: http://onstartups.com/tabid/3339/bid/11886/Why-Venture-Capitalists-Avoid-Innovation-They-Like-Making-Money.aspx

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(A great way to learn about an economy that has a significantly different view of failure is to read "Entrepreneur Nation" by Dan Senor and Saul Singer. How does your state or community stack up? Russ)