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Hurdles to Innovation, Part 2

Originally published March 20, 2008

In the previous article in this series, I advanced the notion that corporations do not support innovation unless that innovation supports the existing value proposition of the corporation. So where is the innovator who thinks outside the box – the entrepreneur – to turn?

Once upon a time, there was the venture capital community that supported new technology and new ideas. Organizations such as Kleiner Perkins, Norwest Venture Partners, Mohr Davidow and many others grew rich buying startup stock at a very low price and reselling it once the startup either went public or was sold to another company. 

In the imitation of the large successful early venture capitalist firms, many other venture firms rose up, trying to emulate at least some of the successes that the early venture capitalist firms had achieved. 

Then came the dot-com bubble. Venture capital firms everywhere poured money into any technician who could spell “dot-com.” In the perfect vision of hindsight, many of the products that were to be sold on the Internet were just plain silly. Brick and mortars were out and the Internet was in. Money flowed from the venture firms like Chardonnay in Napa Valley. The world was a blissful, happy one until the ugly and inevitable day arrived when someone discovered that the basic dot-com business plan was bogus. The venture capital firms had poured billions of dollars into a sophomoric scheme for making money. Any business school graduate could have told the venture capitalists that the dot-com business plan was fundamentally flawed, had the venture capitalists been inclined to listen to anyone other than venture capitalists. 

So an entire industry was left with egg on its face and empty wallets. 

The result was a massive investment hangover. Investment funds literally dried up, and the entrepreneur – the innovator – was left holding the bag. 

At the height of the hangover, entrepreneurs were told, “We will invest in your startup under the following conditions:” 

  • You have a great idea for a marketplace niche that is not being met.

  • You develop the product through the alpha and beta stages.

  • You develop the product to where it is market-ready and installable.

  • You do the marketing to capture market interest.

  • You do the sales.

  • You install and complete the sale at three or four companies.

  • You start to have positive cash flow. 

After these conditions have been met, then maybe the venture capitalist would consider an initial investment in the venture. 

Of course, these conditions set by the venture capitalists are ridiculous. At the point described by the venture capitalist, there is no longer any pressing need for capital. Furthermore, a tremendous amount of capital is needed in order for any entrepreneurial organization to arrive at the point where the venture community might be interested. 

The essence of venture capitalism is high rewards for high risk. Because the venture capitalist world was so badly burned by their blind rush into the dot-com bubble, they were subsequently unwilling to accept any risk for any venture. As a consequence, they gave up high rewards. Venture capitalist firms turned themselves into investment banking firms without even realizing what they were doing. 

The net result of the venture capital hangover is that venture capitalists stopped investing in start-ups. Thus, the entrepreneur is out of luck once again. Much innovation died on the vine because of the massive bad judgment of venture capitalists a half decade before. 

The entrepreneur was trapped because there was no help in the corporate world and the traditional source of capital – the venture capitalist – was settling in for a long Rip Van Winkle snooze.

  • Bill InmonBill Inmon

    Bill is universally recognized as the father of the data warehouse. He has more than 36 years of database technology management experience and data warehouse design expertise. He has published more than 40 books and 1,000 articles on data warehousing and data management, and his books have been translated into nine languages. He is known globally for his data warehouse development seminars and has been a keynote speaker for many major computing associations.

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