Umair Haque / Bubblegeneration
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Design principles for 21st century companies, markets, and economies. Foreword by Gary Hamel. Coming January 4th. Pre-order at Amazon.

Friday, April 01, 2005

VC vs VC

Wasn't gonna blog today, too busy, but this article caught my eye, and I have to dispute it a lil bit. It's by the guys at Signal Lake, who've done a study, and have evidence that venture investments are not correlated innovation - by grabbing venture-backed IPOs, and ranking them on 'innovation'.

Problem is, their methodology has some serious flaws.

1) "...We also eliminated eBay Inc. and other companies that relied on e-commerce business models rather than new technologies. While innovations in e-commerce have created businesses worth billions of dollars, and improved the lives of millions of consumers and retailers alike, finding a new way for them to interact with one another is quite different from coming up with a fundamentally new technology...

In fact, e-commerce business models are almost always grounded in only the slightest bits of incremental innovation."

I think there's a flaw here. There is a 'fundamentally new technology' underlying e-commerce: the www (ve the Net). Without the www, e-commerce isn't possible - or at least, it's market size becomes negligible. So I think here, with one stroke, most of the economic impact of the www has been erased from their sample.

2) "...By far the largest number of IPOs over the course of our 10-year period received a low rating of 4, which was essentially the bottom."

Flaw #2 has to do with the fact that not all venture exits are IPOs. Trade sales etc were excluded from this study. Which is curious, considering the fact that incumbents like Cisco, Yahoo, and Google have chosen to grow via R&D-by-acquisition strategies, instead of organically. So I think the sample is, again, biased.

3) "...In fact, it would be difficult to argue that VCs are ignorant of engineering and other technical areas. A review of the backgrounds of 180 general partners at 20 leading VCs shows that 64 percent of general partners have undergraduate engineering degrees [see table, "A Matter of Degrees"]. But 64 percent also have MBAs, while only 29 percent have master's degrees in engineering or science. So by a wide margin, it seems that the business training of the average general partner exceeds his or her understanding of technology, and that for the people who have both, the technical background supports a business outlook, not the other way around."

Bolding's mine. Flaw #3 has to do with misunderstanding degrees and specialization. I don't think that a two year MBA versus a 4 year undergrad makes your business training exceed your technical understanding. I'd argue the reverse is true - your business training is much less than your technical understanding!

Another point to consider is that the definitions here are narrow. Not all engineering degrees correlate well with venture investing. My degree is in neuro, which makes a lot of sense for the things I'm interested in. But let's imagine I had a CS degree - this methodology wouldn't count it, though for a VC these days, a CS degree is clearly a relevant asset.

Look, I don't wanna belabor the point - I could go on picking holes in the methodology, but the bigger picture is what's really important. I appreciate the sentiment behind the article - venture investing is becoming an increasingly risk-averse market.

I think risk-aversion is an effect, not a cause - and the flaws in the methodology obscure this relationship. Like I've argued before, that venture dynamics are beginning to mirror those of other creative industries, like film, music, and publishing: they're becoming hit-driven dynamics. This causes risk aversion, marketing (or relationship) wars, etc, etc.

-- umair // 7:47 PM // 0 comments

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