“How Venture Capital Thwarts Innovation”

IEEE Spectrum has a fun and worth-reading article called “How VCs Thwart Innovation”. My view: This is a canard. VCs are in the business of making money for their LPs. Sure, sometimes that is done by creating groundbreaking companies, but at least as often (if not more often) it is done by hard work in existing categories where others aren’t executing.
Faulting VCs for not creating enough innovative companies is like faulting investment bankers for not taking enough innovative companies public. In both cases — VCs and investment bankers — the principals are just trying to make the most money for investors, creating (or taking public) innovative companies is a byproduct of that effort, not the whole goal.

Related posts:

  1. Is Venture Capital Worth It?
  2. Newbies Flood Venture Capital (Again)
  3. The Venture Capital Overhang
  4. Pouring, Drinking, and the Allocation to Venture Capital
  5. Venture capital continues the slide

Comments

  1. Brent Buckner says:

    Agreed. The article title would properly be “How VCs fail to encourage innovation as much as we would like”. As the vast majority of the benefits of innovation do not accrue to producers but rather are passed on to consumers (Nordhaus’ paper estimates producers capture only 2.2% of the benefits – see http://papers.nber.org/papers/w10433), it’s not surprising that profit-maximizers don’t deliver the amount of innovation society at large would like.

  2. Innovation & VCs

    Infectious Greed links to a “fun and worth-reading article” on How Venture Capital Thwarts Innovation. It is indeed an interesting piece, not least because, as IG notes, it is not fair to fault VCs. They are in the money-making business,…

  3. dinesh vadhia says:

    Agree with everything you say and is something that many entrepreuners do not get ie. VC-funded companies are investment vehicles until the VC’s sell-out. However, the VC’s do not advertize this fact explicitly and with loose language imply that they are there to help entrepreuners build leading technology companies in new markets and/or category-defining companies (whatever that means!). Here are samples from the websites of two leading VC firms.
    Accel Partners: “A venture capital firm dedicated to helping outstanding entrepreneurs build category-defining technology companies.”
    Sequoia Capital: “We like to invest in new, rapidly growing markets where customers have enthusiasm for the company’s products.”

  4. James DeLong says:

    I posted a link to this entry on our website, IPCentral.Info (see Trackback), and got an interesting comment from Patent Chronicles with some reservations about the article. See http://www.patentchronicles.com/. For more discussion of his thoughts, see http://weblog.ipcentral.info/archives/2005/04/vcs_innovation.html