While VCs love to find and fund innovation, they’re terrible at producing it.
5 min read
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The source of your capital matters as much as your ability to access it. People with bad loans will affirm this — people with VC funding will swear by it. In the world of the startup, the rules of the VC and the money they offer are accepted in the same breath, often to the detriment of the entrepreneur.
Whose timeline is it anyway?
Despite the holier-than-thou reputation, at the end of the day, VC money is borrowed money just like any other. That means, explicit or not, there’s a repayment timeline. For an entire fund, the payment window is usually 10 years, with the first five serving as the investment window and the latter five representing the window for the money return. Entrepreneurs slot in all along this timeline, with each subsequent year squeezing them a little tighter and heightening the expectations for a quick-turn on obscene profits.
After all, the goal of a VC isn’t just for their money to return. The goal is for their money to explode. VCs want companies to get acquired or go public as quickly and successfully as possible so they can get their doubled (or tripled, or quadrupled …) profits and move on to the next wannabe WhatsApp. For investors, the 10-year horizon acts as an accountability framework for their wealth — but for entrepreneurs it’s a time bomb.
This is especially true for startups embarking on truly net-new technologies. These companies, which usually sit in the fields of science, deep AI and distributed ledger technologies, have slower gestation periods. Their breakthroughs are unlikely to fit a tight 10-year timeline, yet, as each year passes, they feel pressured to sell out as “the Keurig for juice” or Blue Apron for dogs, just to meet VC numbers.
This tension reveals a battle for the funding horizon in Silicon Valley. On one side is the timeline of the VC — on the other, the scientific method. This rift between funding and goals means startups are experiencing an untenable misalignment of business priorities and scientific realities.
Though we complain about the shallow interests of startups, we simultaneously keep in place the systems that penalize entrepreneurs that dare to dig deeper or dream bigger. The dark underbelly is this: We are making it financially risky to attempt to advance science.
And this model doesn’t stop with the rounds of funding. Even when companies get acquired or go public, they are held to the same expectations of profit over progress. Consider companies analyzing their budget. The first department to get cut is R&D. This prioritization of revenue ignores the fact that deep AI requires funding to achieve innovation — the same goes for science and distributed ledger technologies.
And, unfortunately for venture capitalists, innovation of this kind doesn’t pace to a quarterly projection.
New money, more problems
I’m not alone in recognizing this problem. In 2015, VentureBeat reported on a new trend: the venture production studio. Still alive and well, with more popping up all the time, these venture studios are designed to provide resources, expertise, and services to the new startup. More than an accelerator, the studios are supposed to act as true co-founders, offering some much needed intellectual alignment.
Finally, a place for an investment model that appropriately values R&D. However, while the rush to exit may be dulled in venture studios — as investors are theoretically just as intertwined in the science and tech as the inventors — the financial incentive is still present. After all, the end goal of venture studios is still to have an impressive set of numbers to point to, and at the end of the day, a venture studio is not a permanent home for scientists or researchers. It’s just another office.
And this office can get easily overcrowded. While production studios provide a great opportunity to build and grow products with entrepreneurs, the model ultimately encourages unnatural or unfitting partnerships. Investors get the title of founder, and inventors ultimately get relegated to just another team member. Though it’s a new system, it’s the same old result: Entrepreneurs get stuck with the shortest draw.
Related: Here’s How AI Is Changing VC Funding
We deserve better.
While VCs love to find and fund innovation, they’re terrible at producing it, which is why we’ve been stuck with these antiquated models. If deep science and frontier tech companies are going to have any success, these entrepreneurs need to take matters into their own hands and create an entirely new model of investment.
And the time is now. Federal funding of science has been steadily declining since 2006. If we continue to limit science funding in the name of near-sighted profits in the private sphere as well, we’ll leave inventors broken and bankrupt. Entrepreneurs certainly feel this restriction, which why they feel willing to work on the VCs’ schedule in the first place. However, it’s time to look a gift horse in the mouth and acknowledge this system isn’t working.
Not since the moon landing have we managed to fit scientific progress into a 10-year timeline.
Entrepreneurs battling for the next great wave of discovery and scientific development need to dictate their own schedule, even if they still can’t pay out of their own pocket.
For me, investing in technology takes faith. No exits or acquisitions required.