Risks and Rewards

I don’t envy venture capital firms, after the dot-com boom & bust finding the right risks to bet investment dollars on has to be frustrating.  I appreciate this even more as I lead a startup and talk to potential investors.  Investors have an incredibly hard decision to make on how much and what type of risk is worth taking.  But these discussions have also make me wonder where the next generation of innovation will really happen.

I am happy to say there is a healthy approach to taking risk.  Basically there is more respect being given to investment dollars out there.  This is important because it means venture firms are spending more effort on quantifying and understanding risk, which will help delay the next bust (and hopefully lessen its impact).  Everyone is better off when investment dollars are well spent.

Yet, it is disappointing to see what type of risk scares venture funds.  There is a consistent message that “development risk” is to be completely avoided.  I realize “divining” how a company will overcome development hurdles is more art than science, and therefore almost impossible to quantify.  However any truly breakthrough product is bound to have notable development risk.  Firms that take and succeed at this challenge will lead the next revolutionary markets.  The reward for backing this type of risk is very high, but requires doing something hard.  But hey most big payoffs come from doing the hard thing, since anyone can (and will) take the easier route.

A Madman has spoken…

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