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VC Funding and Innovation

It seems that even in innovation, there is some wisdom to be gained from the tortoise and the hare.


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It seems that even in innovation, there is some wisdom to be gained from the tortoise and the hare.

Venture capital firms are feeling the economic pinch as are most companies.  Wealth investors who have pledged money for portfolio funds are finding the impact of the global financial crisis is putting a strain on their ability to meet contractual obligations.  As a result, capital calls are not going as well as the venture firms would like.  Rather than strain relationships with key investors that they may rely on in the future, time tables for cash infusions are being stretched out.

All this translates into a paucity of available investment for emerging companies.  Many VC firms are pruning their portfolios by turning off the flow of cash to companies that don’t meet more traditional performance metrics.  Early stage companies are finding it difficult to find funding as later stage companies with less risk seem more attractive to the VC community.  Does this portend the death of innovation?  Not at all.

Believe it or not, innovation happened prior to the modern VC model, and it can flourish without it.  Our current notion of venture funding only dates back to roughly 1946.  What’s more, it’s not clear that the VC model has been that good for innovation.

The goals of the venture firm are not aligned with innovation.  Innovation is hard; it takes time and patience.  Venture companies are interested in time to return.  Most venture companies are looking at three to four year monetization horizon.  Their interests are in maximizing the return for their portfolio funds and not necessarily in successful innovation.  As a result, VC funded startups are often encouraged to run at a pace that destabilizes the company and undermines their ability to become a sustainable enterprise.

There are options available to early stage companies.  For example with a strong value proposition, it is possible to get future customers to provide funding with prepaid commitments of future purchases of the new product.  (This is how I funded my first business venture.)  If your product value proposition interests with a major player’s space, you may be able to get them to provide angel funding in exchange for an inside track in a partnering relationship.  This has the added benefit of setting up a future exit partner.

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Without going through all the funding avenues that may be available, the two cited provide good examples of life without VC.  These options can leave you with more control and equity in your enterprise, and hence more autonomy to pursue your vision.

Don’t be discouraged it you think that the lack of stacks of VC money are going to inhibit your success.  The fact is most companies that have a meteoric rise also experience just as rapid a decline because they did not have the opportunity to burn-in the business model and achieve a sustainable venture.  If you look around at the successes that have had staying power, they tend to have taken time to reach their potential.