The key to the quest for innovation is to realize how venture capital has turned innovation arbitrage subprime over the last 20-years or so. A uniformity of intake criteria spawned by the collusion of investors, and further eroded by excessive deal fragmentation and syndication, rendering in-turn the very definition of innovation – designed to change the world for the better – subprime.
On the whole, an ill-formed assessment of risk in venture capital also lies at the foundation of its non-repeatable and inconsistent asset-class returns, very few exceptions (a handful of funds). A reason why many asset managers shun it for a good reason. But I digress.
Hence, what most entrepreneurs today refer to as innovation is nothing more than a downstream sub-optimization of a temporal interpretation of truth. Propositions that seldom produce viable venture-style returns, save for a “lucky” few able to persuade the unsuspecting greater-fools. The smoke-screen of many me-too propositions now “suffocating” the investors that spawned it.
So, while a discussion with investors for downstream innovation evolves around the uniformity and commoditization of risk, and in reality the staunch protection of investor downside, discussions about upstream innovation are about the alignment of foresight between entrepreneur and investor, and the most realistic trajectory and financial runway towards the upside.
Discussions with investors about upstream innovation allow you as an entrepreneur to take your time and “marry well” because the opportunity will not fade quickly. Discussions about downstream innovations are the opposite, hastily and mired in nervousness – excitement soon to sink into the morass of portfolio plays.