Tuesday, May 8, 2012

What happened to the future! Too much funding of incremental me-too ideas

Alex Madrigal notes on his Atlantic blog that Amazon just bought Kiva, a company which makes robots for the logistics industry, for $775 million. The company is a major success. It claims to triple worker productivity in warehouses.

But it couldn't raise any money from the venture capital industry when it started up.

What does it mean? "Just one more pebble of evidence on a growing pile that Silicon Valley has been too focused on small ideas in the social space." is the subtitle of the post. Too many new "me-too" consumer social network ideas, too few transformative companies. 

Madrigal links to a damning manifesto by the Founders Fund, a major venture capital company led by Peter Thiel.

Along the way, VC has ceased to be the funder of the future, and instead has become a funder of features, widgets, irrelevances. In large part, it also ceased making money, as the bottom half of venture produced flat to negative return for the past decade.

We believe that the shift away from backing transformational technologies and toward more cynical, incrementalist investments broke venture capital. Excusing venture’s nightmare decade as a product of adverse economic conditions ignores the industry’s long history of strong, acyclical returns for its first forty years, as well as the consistently strong performance of the top 20% of the industry. What venture backed changed and that is why returns changed as well.

On the one hand, it's bad news. On the other, we shouldn't be surprised. Thomas Kuhn's categories are notoriously overused, but still, it's not surprising that the equivalent of incremental "normal science" is, well, normal. Paradigm shifts are rarer.

But there is still huge potential for massive transformation, as we were discussing last week.


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