This one is an easy one. VC’s aren’t in the business of funding innovation. They are in the business of profiting from innovation.
As we have seen before VC’s are generally late entrants into the innovation cycle and that’s why VC investment is a lag indicator of innovation in the US economy rather than a lead indicator.
This is primarily because of the time it takes to generate investor awareness in the opportunity, raise the funds and then allocate those funds to suitable opportunities.
This inherent delay in the fund-raising cycle simply means that VC don’t actually fund innovation but they do provide the investment dollars that significantly amplify the Boom:Bust nature of the innovation cycle.
We know this because if the VC’s were in the business of funding innovation then their investment would be counter cyclical to the boom bust cycle. This in turn suggests that VC industry are in the business of profiting from the late growth opportunities in the Innovation Cycle rather than seeding the Innovation Cycle.
Once you understand this you will understand why it is so much easier to raise funds from a VC with a late to market me2 later in the cycle than to seek funding for a radical new approach at the beginning of the cycle.
After all the profit is in the sale and it is a lot easier to invest when you know the market is primed to buy.
Further Reading
- How good are venture capitalists at picking winners?
- What’s the exit strategy? More notes on thinking like a VC
- Why do VCs like to share the love around? More Notes on thinking like a VC
June 2nd, 2011 → 5:03 pm
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