Modern venture capital firms are seeing an overabundance of capital similar to what is seen at large corporations. This in turn puts pressure on them to make larger bets to see larger returns. The need for larger bets and larger returns then naturally forces a bias toward innovations that can be mass market quickly (e.g. sustaining innovation) and go against slower, longer term growth that has more inherent risk (e.g. disruptive innovation). Ultimately, it seems that many VC firms because of the natural focus on capital begetting more capital might be even more beholden to the tyranny of finance that threatens to choke innovation.
I recently finished reading Lean Startup by Eric Ries, which includes innovation metrics like those used by Intuit. I thought these metrics actually serve as a decent proxy for long term focus, so I am recopying them here from an HBR article that includes similar enough ones ( https://hbr.org/2015/05/what-big-companies-get-wrong-about-innovation-metrics):
Revenue generated by new products
Number of projects in the innovation pipeline
Stage-gate specific metrics, i.e. projects moving from one stage to the next
P&L impact or other financial impact
Number of ideas generated
However, to this list, I would add metrics related to the speed at which bad ideas are killed based on data (not gut or financial analysis alone). As Innovator’s Dilemma discussed, most organizations typically have no shortage of ideas, but they do have a shortage on resources to execute and turn those ideas into viable businesses. That money generated shouldn’t be judged on the same token as the existing business–expecting a particular return, but rather just on new money generated in areas the company had not been in previously. I would also want to add some form of metric looking at percent growth of businesses that have been started within the past five years to ensure that what’s being created isn’t just receiving a novelty bump and truly extends into future business.
A recent UChicago economics PhD student wrote one of my favorite papers on this topic (https://www.gsb.stanford.edu/sites/gsb/files/jmp_simcha-barkai.pdf). In it, he argues that reducing labor costs through cutting jobs is an inefficient market solution. In it, he provides support for the case that a decline in both output as well as consumption due to the decreasing use of labor in order to try to improve markups.
I read a piece that GSB put out recently on the fault lines in capitalism (https://www.gsb.stanford.edu/insights/capitalism-killing-america) that spoke to this in a better way than I could articulate myself. However, in an attempt to try, the reason a company exists should be to ensure that company continues to exist and thrive. If executives are focused just on investors and increasing their own wealth (through the stocks they receive as, now the majority portion, of their compensation package) then those organizations may see gains in the short run but will be overwhelmed by the long-term game due to a focus on investments or cost reductions that increase profits often at the expense of innovation.
As discussed in the Capitalist’s Dilemma, most metrics executives are measured on are focused on improvements to a company’s present value and the ratios that investors care about rather than measures of future value and potential growth into new markets or new innovations. Beyond innovation, this also includes diversification of an organization into new areas to the point where if this continues (although Amazon is a clear exception to this–as they are diversifying in a more traditional manner) then we will never see another GE or IBM with tendrils across the entire economy.
A core tenet of capitalism includes continual growth; however, much of the mechanisms of capitalism are currently focused on reducing costs for the appearance of growth. While capital might no longer be a scarce resource, many of the other mechanisms are still fixed resources: raw resources, labor, and established markets. As Western populations head toward a decline as we approach the retirement and their addition to the system begins to become a subtraction and the next generation is insufficient to replace them in the marketplace, we are heading toward a potential labor decline. This labor decline will also coincide with a consumption decline in the Western world as fewer workers also means a more limited market to sell goods and services into while very little investment has been made (by Western companies) into the markets of Africa and less populated Asian countries to create new labor and consumer markets. Colonization of space might also be an opportunity to expand, primarily through a combination of increasing natural resources from mining other worlds as well as the unique market needs of these first colonists; however, that is unlikely to come in time for the decline in growth that will coincide with the retirement of the Boomers.
This was my first time reading this piece; however, I have seen these ideas in action both at startups and large corporations. The tyranny of finance have choked out not just the mechanisms of innovation but also the marketing dollars that may sometimes be necessary to raise awareness of these innovations.
To change the behaviors of the investors and funds is likely a losing battle; however, perhaps something can be done to ensure the boards and CEOs are willing to accept short term falls in the stock in favor of more long term gains from investments. Can this potentially be at least partially accomplished by making shares granted to executives and board members have a longer vesting cycle or provide incentives based on innovation metrics rather than just financial ones.