Saturday, 4 February 2012

Investor Risk Aversion

My first job, after graduating from MIT with a bright, shiny, MBA in technology innovation management, was to head the R&D department for Occidental Industrial Chemicals Group.  This was daunting task, not just because I had never managed so many people before, but mainly the department had floundered without a director for 18 months.  I managed to sort out the people and program issues and we evolved a system in which we had a number of early stage projects (relatively inexpensive), a few which looked more promising (starting to spend real money) and a couple which were in pilot stage advancing towards commercialization (which cost mega bucks).  I was quite proud of this funnel system at the time, and only realized later that it was quite a usual management approach adopted, for example, by DuPont,  who were much better at developing new products than we were at Oxy.

Fast forward my career by a decade, and I joined a venture capital company in Boston.  I imagined, expected, that they would use a similar management system - lots of early stage investments, and some later stage ones in a portfolio.  But they didn't do that at all.  What they tried to do, was de-risk investments as far as possible, by buying into existing private companies, syndicating investments and other approaches to protecting their capital. Even that didn't work particularly well, and I still recall the chagrined face of one of my colleagues when he announced the write off of $2 million.

There was an early stage investment division at the VC, somewhat curiously named "Ventures", which looked for opportunities to get into the next Microsoft, but would never back a very early stage technology.  Ventures was looked down upon by the "real" VCs.

Which leads me to Red Script Ventures, started by Johnson & Johnson in 2009, a start-up accelerator program designed to bring one new venture a year into the company; reported by MIT's Technology Review -Inside Johnson & Johnson's Innovation Shop.  It is good to see that at least one major corporation recognizes the need to nurture high risk early stage ventures.  It's just a shame that the venture capital industry has forgotten what business it is in.

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