Disruptive Thoughts - Latest Comments in Innovative Venture Capitalists

Re: Innovative Venture Capitalists

Daniel Popov — Mon, 06 Feb 2006 17:39:52 -0000

Fraser, sorry for the long pause - was swamped at work.

what you say is true, no doubt. What makes me think is not the relative importance of marketing vs. development (crudely put) but rather whether some sectors/IT products demand a tightly-knit development team and the attempts to 'de-knit' such a team, be it through the use of outsourcing, offshoring or using open-source software, may be deleterious on the innovative capacity of these firms. I am curious to find out whether startups really feel a competitive pressure to get their costs further down and are thus embracing new product development (and potentially business) models. An 'incubator-VC' may be important here - but has that not happened already? We know that there is a lot of money chasing few deals (a lot of e-buzz about that) - in that case we should see the VCs trying to differentiate themselves and providing a more hands-on help to startups would be just the answer. Has that happened? I do not know enough (comments welcome here) but if it has not then it is b/c the VC does not see value in that (nor the startup, for that matter, or else there would be a demand)

Re: Innovative Venture Capitalists

Daniel Popov — Mon, 06 Feb 2006 16:39:52 -0000

Fraser, sorry for the long pause - was swamped at work. what you say is true, no doubt. What makes me think is not the relative importance of marketing vs. development (crudely put) but rather whether some sectors/IT products demand a tightly-knit development team and the attempts to 'de-knit' such a team, be it through the use of outsourcing, offshoring or using open-source software, may be deleterious on the innovative capacity of these firms. I am curious to find out whether startups really feel a competitive pressure to get their costs further down and are thus embracing new product development (and potentially business) models. An 'incubator-VC' may be important here - but has that not happened already? We know that there is a lot of money chasing few deals (a lot of e-buzz about that) - in that case we should see the VCs trying to differentiate themselves and providing a more hands-on help to startups would be just the answer. Has that happened? I do not know enough (comments welcome here) but if it has not then it is b/c the VC does not see value in that (nor the startup, for that matter, or else there would be a demand)

Re: Innovative Venture Capitalists

Fraser — Wed, 01 Feb 2006 21:06:24 -0000

Looking forward: DK, you touch on it a bit with your "incubators are unsuccessful, likely for many reasons" thought. I'll explore that when my brain finishes cycling on it, but that's exactly why I've used "incubator-like" throughout my post/comments.

Re: Innovative Venture Capitalists

Fraser — Wed, 01 Feb 2006 20:59:33 -0000

Hi Daniel,

Your two comments have had me thinking over the past few days - thank you for sharing your views and insights. I appreciate the amount of thought you've provided me with.

I'm going to talk about your other comment in a future post but I want to touch on a few things with respect to the comment you left above.

To clarify, these two posts weren't focused solely on consumer-centric internet applications. The ideas presented throughout them are intended to address venture capital, innovation, and commercialization across a wide range of industry. (It just happens that a lot of discussion occurs online around web applications, and the sources were easier to find. If anything the arguement is not faulty. At fault is a lazy author who was too excited to get an evolving thought out of his head and into a presentable form --- I should have spent more time finding examples in a variety of industry)

You're right that there needs to be a balance between technological innovation and marketing. I don't believe that one is of a higher importance than the other. You can't get very far broadcasting a great message about a lousy product. You can't get very far hiding a great technological innovation in your closet. The two need to go hand in hand and are of equal importance. Innovation, commercialization, and marketing are all critical when introducing a new product.

A big aim of the incubator-like atmosphere should be finding solutions for labour intensive processes. Whether through outsourcing to offshore centres or a local shop down the street, a VC could provide a well managed relationship that can easily be tapped into.

Re: Innovative Venture Capitalists

Fraser — Wed, 01 Feb 2006 20:06:24 -0000

Re: Innovative Venture Capitalists

Fraser — Wed, 01 Feb 2006 19:59:33 -0000

Hi Daniel, Your two comments have had me thinking over the past few days - thank you for sharing your views and insights. I appreciate the amount of thought you've provided me with. I'm going to talk about your other comment in a future post but I want to touch on a few things with respect to the comment you left above. To clarify, these two posts weren't focused solely on consumer-centric internet applications. The ideas presented throughout them are intended to address venture capital, innovation, and commercialization across a wide range of industry. (It just happens that a lot of discussion occurs online around web applications, and the sources were easier to find. If anything the arguement is not faulty. At fault is a lazy author who was too excited to get an evolving thought out of his head and into a presentable form --- I should have spent more time finding examples in a variety of industry) You're right that there needs to be a balance between technological innovation and marketing. I don't believe that one is of a higher importance than the other. You can't get very far broadcasting a great message about a lousy product. You can't get very far hiding a great technological innovation in your closet. The two need to go hand in hand and are of equal importance. Innovation, commercialization, and marketing are all critical when introducing a new product. A big aim of the incubator-like atmosphere should be finding solutions for labour intensive processes. Whether through outsourcing to offshore centres or a local shop down the street, a VC could provide a well managed relationship that can easily be tapped into.

Re: Innovative Venture Capitalists

Daniel Popov — Tue, 31 Jan 2006 14:53:13 -0000

I just posted a long piece on the earlier post by Fraser. His post today is an excellent elucidation of the earlier idea. In light of what I argue in my response to the earlier piece - is there not an over-focus on 'marketing' as opposed to 'technological innovation'? This goes to the core of what we consider 'innovation' - constructing new ways for the consumer to utilize the internet is extremely important. Yet it remains only one of the many different forms of innovation and it may not be the one that is the most 'productivity enhancing' or, simply put, 'profitable'.

Why are we ignoring the sort of innovation where the bulk of effort goes to the programming at the beginning and the marketing is secondary? My earlier post noted that 'security, firewalls and encryption software' is a major and growing segment of the US software start-up industry. Here, a startup would need much more of the 'incubator support' at the first stage rather than the verification and scaling of product.

Not to belabour the point, but isnt this where the subject of offshoring may come in again? If the startup process is 'labour intensive', with large code-writing requirements, then this is where part of the incubator function for the VC could be to facilitate linking the US startup with a (propriotary?) offshoring center thus significantly reducing the development costs (if this break-up of the development process is carefully managed)

Re: Innovative Venture Capitalists

Daniel Popov — Tue, 31 Jan 2006 13:53:13 -0000

I just posted a long piece on the earlier post by Fraser. His post today is an excellent elucidation of the earlier idea. In light of what I argue in my response to the earlier piece - is there not an over-focus on 'marketing' as opposed to 'technological innovation'? This goes to the core of what we consider 'innovation' - constructing new ways for the consumer to utilize the internet is extremely important. Yet it remains only one of the many different forms of innovation and it may not be the one that is the most 'productivity enhancing' or, simply put, 'profitable'. Why are we ignoring the sort of innovation where the bulk of effort goes to the programming at the beginning and the marketing is secondary? My earlier post noted that 'security, firewalls and encryption software' is a major and growing segment of the US software start-up industry. Here, a startup would need much more of the 'incubator support' at the first stage rather than the verification and scaling of product. Not to belabour the point, but isnt this where the subject of offshoring may come in again? If the startup process is 'labour intensive', with large code-writing requirements, then this is where part of the incubator function for the VC could be to facilitate linking the US startup with a (propriotary?) offshoring center thus significantly reducing the development costs (if this break-up of the development process is carefully managed)

Re: Innovative Venture Capitalists

DK — Tue, 31 Jan 2006 11:54:21 -0000

Great follow-up!

It sounds like what you're describing is along the lines of what Fred Wilson is doing: more rational valuations, more niche, full understanding of the product, etc.
As for incubators, I will try and find some literature but my understanding is that formal incubators (ie government funded geographical ones) are unsuccessful, likely for many reasons. However, a model based on the principles above is being used by Y Combinator and seems to have early success.

It is interesting for me to consider how it would work in healthcare. The VC generalist will be pushed out by the VC niche. How can a VC firm realistically support accurate valuations, good due diligence, strong commercial networks across health IT/pharma/biotech/device in their portfolio companies? I will give this some more thought, but I bet that the Family Doctor VC fund ("life sciences fund") will be pushed out by the Specialist ("oncology VC, cardiology VC, radiology VC"). The Family Doctor will move up the chain to later stage investing where their generalist skills are more appropriate.

Another VC value-added I'm trying to wrap around is the bundling effect. I think it was alluded to in the book Starting Something, where KP created communities of startups that would drive the adoption of the others' products. I'm trying to think of that equivalent in healthcare VC. Would it be VC partnering with hospitals? I've found hospitals are brutally slow in considering new products, thus hindering their development phase for a startup. Will have to give it some thought...

back to work!

Re: Innovative Venture Capitalists

Chad Sakonchick — Tue, 31 Jan 2006 11:23:29 -0000

Fantastic followup! While reading, I kept comparing your suggestions to what my needs were during different stages of my development. I couldn't agree with you more. This "incubator" style of VCing would allow many many more small businesses to come to fruition. During the early stages they can innovate and develop while someone else takes care of the business aspect. The VC's can keep tabs on whether the trepps are going in the right direction with focus groups and testing. Once the product has gone through the gauntlet, they're ready for the big money to take them to the market.

Spending less money on IF's and more money on WILL's will prevent another bubble and give the economy the stability it needs.

Re: Innovative Venture Capitalists

DK — Tue, 31 Jan 2006 10:54:21 -0000

Great follow-up! It sounds like what you're describing is along the lines of what Fred Wilson is doing: more rational valuations, more niche, full understanding of the product, etc. As for incubators, I will try and find some literature but my understanding is that formal incubators (ie government funded geographical ones) are unsuccessful, likely for many reasons. However, a model based on the principles above is being used by Y Combinator and seems to have early success. It is interesting for me to consider how it would work in healthcare. The VC generalist will be pushed out by the VC niche. How can a VC firm realistically support accurate valuations, good due diligence, strong commercial networks across health IT/pharma/biotech/device in their portfolio companies? I will give this some more thought, but I bet that the Family Doctor VC fund ("life sciences fund") will be pushed out by the Specialist ("oncology VC, cardiology VC, radiology VC"). The Family Doctor will move up the chain to later stage investing where their generalist skills are more appropriate. Another VC value-added I'm trying to wrap around is the bundling effect. I think it was alluded to in the book Starting Something, where KP created communities of startups that would drive the adoption of the others' products. I'm trying to think of that equivalent in healthcare VC. Would it be VC partnering with hospitals? I've found hospitals are brutally slow in considering new products, thus hindering their development phase for a startup. Will have to give it some thought... back to work!

Re: Innovative Venture Capitalists

Chad Sakonchick — Tue, 31 Jan 2006 10:23:29 -0000

Fantastic followup! While reading, I kept comparing your suggestions to what my needs were during different stages of my development. I couldn't agree with you more. This "incubator" style of VCing would allow many many more small businesses to come to fruition. During the early stages they can innovate and develop while someone else takes care of the business aspect. The VC's can keep tabs on whether the trepps are going in the right direction with focus groups and testing. Once the product has gone through the gauntlet, they're ready for the big money to take them to the market. Spending less money on IF's and more money on WILL's will prevent another bubble and give the economy the stability it needs.