Innovation primer
The performance of the innovation's business is dependent on the economic model under which it operates, the latter which directly affects the risk deployed by investment capital and how it turns an entrepreneurial vision into a rewarding reality.
The marketplace of innovation
In the marketplace of innovation limited partners (managing assets from pension funds, family offices, wealthy individuals, etc.) supply money in exchange for an ownership in the groundbreaking ideas from entrepreneurs, with venture capital as the innovation arbitrage (as shown on the left).With the massive opportunity of an 80% adoption greenfield in technology, more highly qualified entrepreneurs than ever and truckloads of monetary resources from limited partners, venture capital as the arbitrage of innovation managed to underperform as an asset class, underperform compared to the corporations it is supposed to feed and erodes the trust of the public, limited partners and groundbreaking entrepreneurs.
Improper deployment of risk
Venture capital, which once started as a thriving catalyst of innovation has struggled to produce scale and returns in line with its gaping opportunity, hanging by a thread to a handful of opportunities that have yet to produce social economic value the public can trust again.By the deployment of a uniform investment thesis venture capital has overwhelmingly turned subprime, with only a few entrepreneurs cunning or lucky enough to escape its wrath, and the potential to save face of another investment vintage.
Venture capital's performance and thus the ability of innovation to feed its greenfield is artificially limited by the systemic deployment of subprime risk that by economic principle can only yield subprime investment returns.
Dire laissez faire consequences
Swept away by early success stories in the technology sector, limited partners (as the investors in Venture Capital firms) have submitted to and fed a laissez faire investment strategy void of the most rudimentary discipline.The result, we first found out and published, is endless diversification (more than 10 levels deep), endless fragmentation (subprime) and minimal public accountability in the deployment of risk and money. Deplorable Venture Capital performance should therefore not come as a surprise.
Subprime Venture Capital kills innovation
Yet what is even worse is that the deplorable performance of Venture Capital has already deflated the faith in the ability of innovation to accurately target an 80% adoption greenfield.Many of us forget that not innovation decides its own destiny, but the arbitrage deployed by Venture Capital (as the only available financial instrument to support its full runway) is responsible for the innovation it can detect.
The economic fix
The answer to improving the success of innovation is not to deploy the same deflated risk through new distributions (amazing, the wild stuff people come up with), but to deploy compatible risk to the outlier entrepreneurs that deserve it.The best way to improve our innovation output is to take Einstein's quote serious:
And thus not the way we innovate is in question, but the currently economically incompatible process by which we arbitrage innovation. It is the reinvention of that arbitrage that lies at the foundation of the fix to the innovation's business.Whether you can observe a thing or not depends on the theory which you use. It is the theory which decides what can be observed - Albert Einstein