WTF Venture Industry? A Friday Rant on Risk

Solving the world's problems is the biggest potential "growth" industry today. So every time I open my Google reader and see a story about how venture investments are down, or shifting to later stage companies, or focusing on proven entrepreneurs, I can't help but think: WTF?

Now I understand the arguments; time of recession, you have valued investors money that you can't just toss around willy-nilly, the rules of the game are changing and so it makes more sense to go with safe bets, lets just hunker down, invest in clean tech cause that's obviously going to be big and go from there.

And then I think, no, wait a second, that's rubbish. This is the venture industry we're talking about here. The job of the venture industry is to find innovations that meet tomorrow's societies needs now, or unleash new opportunities for people to use their talents to build things or lead more fulfilling lives, or solve problems on a scale that nonprofits can't or whatever. The point it's about creation and it's about risk.

I think Umair Haque nails it exactly on the head when he talks about the perverse irony of Wall Street and the Venture industry's recent approach to risk:

Wall St's moral hazard has a mirror image.. The perverse irony of the collapse of industrial-era capitalism isn't just that Wall St ended up being massively risk seeking, taking bets it never should have. It's also that venture capitalists ended up being risk averse - never making the bets they should have.

See the point? Both are flip sides of the same coin of moral hazard. Left unmonitored, thinly regulated, opaque, unaccountable, myopic, and cronied to the max, Wall St was free to take hidden action that maximized it's near term profits - overinvesting in toxic securities. For all the same reasons, venture investors have been free to take hidden action that maximizes their own near term returns - underinvesting in radical innovation.

What I'd like to see when I open my inbox are headlines like these:

• "Venture capitalists can't buy enough flights to the developing world to identify high potential entrepreneurs,"
• "Blended Value Investment Firm X has to turn investors away for their next social enterprise fund,"
• "Giant Firm Y declares themselves "Lemmings No More" and creates the "shut up social networks and semantic web" fund to invest in new electronic health care services and online education"

The point is that what we've got today ain't cuttin' it and the opportunities seem not to be all that closely aligned with the cash. Entrepreneurs are vital to building the new institutions we need from health care infrastructure to clean tech and beyond. But they're not always going to look today's entrepreneurs. Almost definitely, they're going to come from different places and have different perspectives. They're going to be connected by a reassertion of a different understanding of "value" that has nothing to do with how much advertising they can sell.

(From The Funded)

Two grains of salt to take this rant with. One, there are some truly awesome folks out there who get this and are pushing forward. I learn more every day from Union Square Ventures' Fred Wilson, and I love how much time he takes to think and learn from the people who respond to his blog. VC giant Sequoia has been a leader on clean tech and just bought in to the Y-Combinator model for early stage tech startups. The folks at firms like Good Capital, Gray Matters, and New Cycle are finding the companies of the future with social and environmental returns baked into their DNA. Endeavor and Acumen Fund are experimenting with ways to support innovation and solve problems at the bottom of the pyramid and kicking butt. Jon Gosier's Appfrica and their supporters at Kuv Capital are betting on talent in East Africa in a way that I hope becomes a model for others. And groups like All Day Buffet just don't give a crap who tells them they can't build a totally new venture structure and are doing it anyway. But these are still drops in the bucket of the industry as a whole.

Second grain of salt: I'm a 24 year old social entrepreneurship blogger armchair critic of the venture industry. That's a totally reasonable critique and I hope to hell I'm wrong and that VCs have dozens of game changing innovators up their sleeves who are fundamentally rebuilding our broken institutions.

But my perspective is one of a generation that's inheriting our current set of broken institutions, an environment on life support, and a credit scene that's created the worlds greatest Ponzi scheme in which all are implicated. I love the passion and fervor in the nonprofit industry, but it can't do it on it's own. The scope of the problems are simple to big. With so many problems, "doing good" is the financial world's biggest growth opportunity, so why aren't we doing more of it?

So until I have the resources to do more, yes, I'd like to see the industry that is supposed to be the vehicle of innovation and progress in society take more risks on solving the problems of today and tomorrow.

I've never wanted to be called full of it so much as on this post. If you know of wonderful, game-changing innovations that VCs are making bets in, or have good reasons why I'm full of it, tell me. Restore my faith.