Radical Innovation Needs Old-School VC

When did risk capital start playing it so safe?

We currently have an abundance of venture capital for projects that are not that risky, such as platforms and apps that promise to make our lives more convenient. These innovations largely disrupt markets and competition — but don’t disrupt the biggest problems facing humanity. We don’t have enough green energy options, and we lack the technology that could suck enough CO₂ out of the atmosphere to restore the climate’s balance. According to the United Nations, more than 800 million people — a tenth of the global population — are undernourished today. We don’t know how to cope with a growing world population or stop overexploiting natural resources.

The problem is that too many truly radical innovators suffer defeat in innovation’s valley of death: what we call that intermediate point where bootstrapping can’t get them any further, yet it’s hard to get the funds that are vital to further development and scaling. That dry stretch, during which the venture works on proving its concept to investors who want evidence they are making a good bet, is often too long for the venture to survive. In essence, this is a case of capital markets failing to support breakthrough innovations and deep technologies.

This has to change fast. While government has a role to play, so does venture capital. It’s high time for the high rollers in VC to shift from financing the easy digital-asset classes to funding more fundamental scientific and technical advancements.

A return to venture capital’s roots might also promise bigger returns for the risk tolerant. Investments in asset-light companies, such as software-as-a-service providers or platforms, are now significantly riskier than they were in the 2010s because of increasing competition and low levels of innovation. Making a sufficient number of bets no longer works when a company’s valuations get so high that there’s no way its earnings will ever justify them, even if the business continues to grow at a healthy rate. At the same time, there’s a lot of excess money sitting around in the VC system that could and should be invested, but investors are waiting for interesting opportunities.

This money is known as dry powder in industry jargon.