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Investing in Innovation: The Circle of Life

It’s easy to construct an “us” versus “them” mentality between startups and investors, especially when there are so many disgruntled founders who’ve had the door slammed in their face. But I’d hardly make the generalization that investors avoid innovation. While it’s true that proven returns are required in the majority of portfolio companies, it’s these revenue generating deals that tend to lift up the longer term innovation-based investments.

Andy Singleton’s recent article for On Startups suggests that VCs avoid innovation whenever possible. Writes Singleton, “If you ask VCs what they look for, they use words like ‘traction’, ‘proven business model’, ‘reference customers’, and ‘invest in marketing’ or ‘sales and marketing’… It doesn’t take a genius to understand what they are saying.  As much as possible, they want to avoid all innovation (stuff that’s not proven).  It’s risky and unprofitable.”

I know this isn’t going to be easy to hear, but the above statement isn’t entirely true. It’s not that investors want to avoid ALL innovation or even all risk. It’s that most want to avoid YOUR innovation. There’s no plot to crush the inspiration of the “animal spirit”, no interest in thwarting civil society, the issue isn’t that investors are short-sighted jerks, it’s that they need more cash cows (especially in this garbage heap of a global economy) to balance out the big audacious paradigm shifters.

VC’s don’t print money. Cash cows allow VC’s to continue raising funds and these funds are then dispersed across the portfolio to others who are pre-revenue. In other words, we can’t all be whimsical geniuses with a three year launch plan. If VC’s started doling out money to every starry-eyed pre-revenue entrepreneur and ignored those cash cows that pick up the slack, funds would implode on themselves. It should come as no surprise that you can’t pay for office space and servers with sweet dreams and pixie dust. You may not realize it, but if you’re funded and you aren’t generating revenue, someone else’s profit is likely paying for your existence.

This isn’t to discourage you from innovating or building something you believe in, it’s just a reminder that if you aren’t generating profit, there are no guaranteed rewards for hard work or good ideas. If you really are “an irrational animal spirit” then you’ll continue to take risks regardless of the outcome.

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