Venture capital was once the primary vehicle for disruptive innovation, but that is no longer the case. Understand what has changed
Venture capital funds by their nature finance experimental initiatives, which have the potential to disrupt a market. The efficiency rate is 10%: that is, for every ten sponsored projects, it is expected that only one will “win”.
The basis of VC, therefore, should be experimentation. Should. The truth is that, currently, they rarely opt for disruptive businesses, according to Alexandre Nascimento, entrepreneur and Artificial Intelligence researcher at Singularity University:
“It’s a closed club, with a very high correlation, where you tend to follow the other instead of betting on something really different. Since the essence of innovation is doing something differently, perhaps venture capital is unfortunately becoming incompatible with real innovation.”
Although venture capital was created to finance medium- and short-term innovations, today the most common trend is to seek incremental innovations. “And, even better, they are those that quickly find confirmation, as a “de-risking” strategy,” continues Alexandre.
Where we are
Glaucia Guarcello, lead partner of Innovation and Ventures at Deloitte Brasil, clarifies that the venture capital market has suffered many declines in recent years and highlights several reasons:
“These include highly inflated valuation prospects, grandiose speculation, and overly optimized prospects of a post-pandemic world, as the “new normal” has not occurred exactly as expected. And all of this burst the VC bubble.” In this way other forms of financing, such as Corporate Venture Capital (CVC), have also become more attractive for the entrepreneur.
Another important factor mentioned by Alexandre is that investments are not always decided solely on the merit of the company, as there are relational issues involved:
“It is common to include in this account the access that investors can offer to new limited partners (LPs), since they belong to exclusive circles.” Not to mention the conflict of interest that occurs between investing in businesses with quick returns, to be able to show results and later raise new funds, or in primarily disruptive ideas.
Where are we going
That’s why this type of investment needs to change or go back to what it was. Glaucia recalls some intrinsic characteristics of venture capital that many investors, especially Brazilians, are not yet accustomed to:
“Capital from a venture capital fund must be patient, as it takes a long time for a disruptive solution to become viable and scalable. Furthermore, the risk of failure is enormous. Therefore, I think Brazilian investors are not yet prepared for the undertaking itself, which consists of experimenting, testing and accepting failure or error. In the desire to get a quick result, what has happened is the increased risk of making an innovation unfeasible or “killing a good idea” because it did not bring results in the short term.” It’s all a question of expectations and maturity in following the proposed model.
“The venture capital model needs to be redesigned, as there is a huge conflict of interest and alignment between fund managers, partners and entrepreneurs who are truly looking for disruptive innovations. It can take more than two decades to revolutionize an industry [veja a Amazon, por exemplo]and we do not find this kind of appetite in venture capital to finance such an adventure”, summarizes Alexandre, clarifying that it is logical that there are exceptions: “And, for the future and by elimination, I understand that innovation initiatives they are the best path towards disruptive innovations,” he concludes.
Renata Armas he is a writer forUnbox project
an initiative created by Adriele Marchesini, Rodrigo Guerra and Silvia Paladino to reveal the critical thinking that should precede innovation.
Source: Terra
Rose James is a Gossipify movie and series reviewer known for her in-depth analysis and unique perspective on the latest releases. With a background in film studies, she provides engaging and informative reviews, and keeps readers up to date with industry trends and emerging talents.
