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Hurdles to Innovation, Part 3

Originally published March 27, 2008

Previous articles in this series have explored why the corporation is not a good place for fostering an environment of innovation (at least out-of-the-box innovation). And, we have seen that the traditional world of venture capitalism has changed dramatically with the hangover from the bursting of the dot-com bubble.

Does this bleak scenario mean that there is no hope for the innovator – the entrepreneur?

In the traditional sense, the answer is that there is very little hope. But using some creativity, there are other sources of funding for the high tech startup. The next logical source to turn to is the angel investment community.

It doesn’t take many success stories in Forbes and Fortune to pique the interest of the wealthy investor concerning the past successes of the venture capital community. In some cases, there has been a 52% annual noncompounded return on investment over a ten year period for the venture capital community, where both the losers and the winners of the venture community have been included. Those kinds of returns hold a great attraction for the wealthy community of the private, very affluent investor.

The wealthy investor says, “If Kleiner Perkins can do it, I can do it. I may not get quite the rate of return that KP got, but even if I get a somewhat diminished rate of return, it still beats putting money in the bank.” In addition, there is the public exposure of being associated with new and exciting technology.

These wealthy private investors are called “angels.” They differ from the classical venture capitalist in many respects. Angels – in general – have much less money to invest than the collective pool of a moderate venture capital firm. Angels operate in much smaller numbers (of people) than the partnership of a venture capital firm. Angels normally do not have the industry expertise that is found in a venture capital firm. A typical venture capital firm will have a lot of investing and operational experience in one or more industries, such as high tech software, high tech hardware, genetics, and so forth. Most angel investors do not have nearly the breadth of experience that is found in the venture community.

But angel investors do have money, the judgment and background of whoever made the money in the first place, and the ability to make decisions.

The angel investor community is open and available to the innovator; yet, there are definitely advantages and disadvantages to investment by an angel.

Advantages:

  • Angels have the money needed by the innovators.

  • Angels have the ability to make decisions much more quickly than venture capitalists.

  • Angels sometimes have reasons other than profit for investing – including altruism, an element rarely found in venture capitalism.

  • Angels do not necessarily “stack the deck” against the innovator. Venture capitalists almost always “stack the deck” against long term involvement of the innovator. Venture capitalists are fond of doing what they need to do to get rid of the founders and innovators as quickly as possible so that they can bring in “professional” management.

Disadvantages:

  • Angels are often not prepared to go the distance with the complete investing picture. Most investments require multiple infusions of capital (rounds of investment). A lot of angel investors wish to make just a single investment. This can prove to be a problem.

  • Angels are not as easy to find as venture capitalists. At the end of the day, venture capitalist firms make themselves easy to find and relatively easy to access.

  • Angels usually do not have any industry expertise in the business of the companies they are investing in. This automatically raises legitimate questions.

These few thoughts are merely the starting point.

So there is hope in the world of the innovator. But that hope is very different from what it once was, and even with the possibility of real investment, the odds are still decidedly against the innovator.

  • 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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