After the last post on Atrato, I am thinking that VC money might be better invested in proven real businesses. Those that have survived a number of years, though hardship and through growth. There is less risk there.
Ok, the VC model is fundamentally built upon taking a risk on a company. As the spate of failures in (many) markets shows, rewards are far and few between, while risks aren’t seemingly ameliorated by what the VCs do. Georges van Hoegaerden, founder of The Venture Company, has blogged extensively on this.
I highly recommend the linked post. There are some real jewels in there:
Defunct innovation arbitrage
Technology does not create markets, it facilitates marketplaces. Technology is merely a distribution mechanism and a piece of the puzzle that enables the electronic facilitation of (in most cases already) existing macro-economic behavior. So, the reason why Venture Capitalists cannot generate significant returns is because their investment thesis centers around the development of technology, and fewer innovations rely solely on technology to become successful.
Yes … technological success does not guarantee business success. Investing in technology and seeing the technology meet specific goals doesn’t guarantee that the technology will make money for business.
One might think, yes, but technological success is a pre-requisite to business success. You can’t have a successful business without a technology that works.
Makes sense, right?
Too bad its wrong.
Don’t believe me? Should I recount the story of a failed bit of biotechnology for blood pressure moderation, with … well … an interesting adverse effect?.
It might help to define what we mean by failed. Technologies can ‘fail’ at their primary mission, but possibly be redirected and still have a positive impact in market. This requires an intelligent and business savvy development team, who are not … emotionally invested … in the primary mission, but are focused upon being successful.
Pfizer was able to redirect a hypertension medicine to become an ED medicine due to a failure in the primary mission, but the availability of an alternative function that the medicine did well at.
Now, had this been a venture backed biotech, the funding would have been pulled, and the company shuttered.
Of course, apart from our spam filters being filled with offers of something else, we wouldn’t have had a bit of biotechnology to bring to market. And to create wealth. And return on investment.
Hmmm …. one might think that some of the thinking behind VC choices is wrong.
The investment thesis of Venture Capital from 40 years ago is simply no longer valid and yet the private placement memorandums (PPMs) have not fundamentally changed. Entrepreneurs with a more sustainable and economic approach to innovation are automatically rejected and Venture Capitalists have become stuck in their self-induced subprime maelstrom.
I think Georges is indicating this.
If you can’t build and sustain a successful business, it doesn’t matter how good (or bad) your technology is.
Which gets to the previous post on Atrato, and I guess, all the others I could, or will, post about in terms of business failure.
Building a business and a pipeline is not the same as building a technology. Transitioning from a cool project to a successful product is far far more than meeting specific technological milestones.
Risk is enhanced for VC investment, without a corresponding increase in reward for taking this risk, when the investor doesn’t question whether or not the investment will be a real sustainable business.
Sure, sometimes things fail. But we’ve seen some tremendously bad ideas funded. Not that the technologies are bad. Its that the concept of going from a technology to a product for sale is somehow broken.
Will people really be willing to purchase sealed appliances? Opaque technology that, if it fails, their risk goes way up? Will they be willing to pay more for these sealed appliances? Remember, VCs want you to charge more for your product, so your profits will grow faster if it catches on, which makes their exits better (higher valuation for better profits). Is this in line with building a sustainable company? No. Its at odds with this.
I am not saying don’t build a company like an Atrato. What I am saying is, make sure that they have a real fighting chance to build the business. And that means making hard business decisions, and being very careful about growing the business. Focusing upon the path to revenue.
Somehow … I am not convinced this is the VC focus these days. If you start with a company that has survived hardship and grown, chances are you are going to grow a company. Inject or nurture great technology in this company, and it is more likely to be successful than something you bootstrap to commercialize a single specific technology.