4 ms·

Of course the article is correct about US Federal Government funding of DARPA and NIH (and NSF) being the major source of research and innovation. One questio

by graycat 13y ago

Of course the article is correct about US Federal Government funding of DARPA and NIH (and NSF) being the major source of research and innovation. One question is why, that is, why don't private industry, VC funded startups, etc. do more with applied research and innovation? My view of the main reason is that private industry, especially nearly all of finance for the funding (YC is an exception), are not qualified to evaluate such projects. So, such organizations don't. Likely also hurts is that the VC limited partners are likely much less well qualified to do such project evaluations than the VCs and, thus, insist on criteria for VC investment that rule out evaluating applied research or anything non-trivial in technology (or making significant use of such evaluations in funding decisions). Instead, the LPs, and, thus, the VCs, mostly want to see 'traction' in the market. In the past, that approach worked because a VC could be fairly sure that a good project that did get some good traction would still knock on the doors of the VCs for 'go to market' or 'expansion' capital (forgetting that insisting on only such late funding would reduce the number of projects that did get to such traction). But now, as in PG's latest essay, can do some information technology (IT) startups for less than the cost of renovating a bathroom. So, with such low costs, and likely low burn rate, we should, in time, see some major IT startup successes that never took equity funding and were just 'bootstrapped' and have 100% ownership by one person. Likely another reason is that people with the backgrounds to get funding by DARPA, NIH, or NSF are quite reluctant to pursue startups. So, net, it looks like there are some especially good chances for Ph.D. degree holders with money enough to renovate a bathroom to do a startup and become a billionaire! We will see.

rayiner 13y ago
VCs are overwhelmingly finance people, not people with technical backgrounds. Meanwhile, almost every DARPA program manager, the people who make funding decisions, has a PhD. DARPA does a lot of things they won't generate a return, often because much of what they do can't be productized. They flail around in a field and reveal to industry what works and what doesn't. Finance guys would never do that--the near term returns aren't there.
- graycat 13y ago
  My take is that overwhelmingly VCs finance projects with 'traction' where the traction can be measured quantitatively. Thus this measure is a surrogate for traditional financing criteria in terms of revenue and earnings. The problem sponsors at DARPA, NIH, and NSF can evaluate technical projects and fund based on such an evaluation. Funding is not easy to get. For US DoD projects intended to result in something practical, the batting average is quite high, much higher than in VC. Yes, a major difference is that DARPA, NIH, and NSF fund projects intended to have a technical accomplishment, maybe with an actual product. VCs want projects that make a big splash in the market, and that is an additional difficulty. One solution for VCs is to fund technical projects aimed at creating new or much better solutions for what is clearly a "big ass" problem in the market so that if such a solution can be found then there is essentially no doubt the solution will be a "must have" in the market and make a big splash. VCs don't like to think this way. As reported by Fred Wilson in his blog, over the past 10 years, on average VC returns have been poor, e.g., less good than the S&P. There is other strong evidence of poor VC financial returns. VCs aren't doing well so that whatever they are doing should not be well respected. A problem with the VCs, again, is that they can't/won't evaluate technical aspects of project proposals, stay with 'traction', and won't consider technical accomplishments, even if done, even if as peer-reviewed original research, in funding decisions. Net, they won't fund technology, even working and ready for market; instead, they fund 'traction'. Did I mention that they want to fund 'traction' -- that's no joke. For funding "people", sure, people with a project with traction if the people are not just totally wacko.
- tankenmate 13y ago
  The other reason that finance people typically won't go for blue sky stuff is that they need to cash out within 10 years; a few years to select and kick start investments, 5 years of hard work by investees, then a few years for cash out, IPO or sale (preferably cash). There isn't the timeframe in there for R&D.
  - graycat 13y ago
    I never said "blue sky". VCs won't fund research if it's done, written up, in a peer-reviewed journal of original research, and implemented in software written, tested, timed, and documented. Period. No research, of any form, any time, in any case, period. Stop. End. Instead, VCs, and their limited partners, want to see 'traction' in the market. If the traction is from some research, then that's a net negative because (1) it would be something it might be important to evaluate, more difficult to evaluate than just routine software, (2) might make the CEO more difficult to replace, (3) would let the CEO have an easier time telling the Board that they don't understand the business. Instead, VCs want a nice, simple, little business, with traction significant and growing like a weed, in a gigantic market, that can become a company worth $100 billion, that anyone, even a VC, could understand, run by a CEO who tends to drool a little and can easily be talked into signing a bad business deal. "Blue sky" has nothing to do with the situation.

by graycat 13y ago

rayiner 13y ago

VCs are overwhelmingly finance people, not people with technical backgrounds. Meanwhile, almost every DARPA program manager, the people who make funding decisions, has a PhD. DARPA does a lot of things they won't generate a return, often because much of what they do can't be productized. They flail around in a field and reveal to industry what works and what doesn't. Finance guys would never do that--the near term returns aren't there.

graycat 13y ago
My take is that overwhelmingly VCs finance projects with 'traction' where the traction can be measured quantitatively. Thus this measure is a surrogate for traditional financing criteria in terms of revenue and earnings. The problem sponsors at DARPA, NIH, and NSF can evaluate technical projects and fund based on such an evaluation. Funding is not easy to get. For US DoD projects intended to result in something practical, the batting average is quite high, much higher than in VC. Yes, a major difference is that DARPA, NIH, and NSF fund projects intended to have a technical accomplishment, maybe with an actual product. VCs want projects that make a big splash in the market, and that is an additional difficulty. One solution for VCs is to fund technical projects aimed at creating new or much better solutions for what is clearly a "big ass" problem in the market so that if such a solution can be found then there is essentially no doubt the solution will be a "must have" in the market and make a big splash. VCs don't like to think this way. As reported by Fred Wilson in his blog, over the past 10 years, on average VC returns have been poor, e.g., less good than the S&P. There is other strong evidence of poor VC financial returns. VCs aren't doing well so that whatever they are doing should not be well respected. A problem with the VCs, again, is that they can't/won't evaluate technical aspects of project proposals, stay with 'traction', and won't consider technical accomplishments, even if done, even if as peer-reviewed original research, in funding decisions. Net, they won't fund technology, even working and ready for market; instead, they fund 'traction'. Did I mention that they want to fund 'traction' -- that's no joke. For funding "people", sure, people with a project with traction if the people are not just totally wacko.
tankenmate 13y ago
The other reason that finance people typically won't go for blue sky stuff is that they need to cash out within 10 years; a few years to select and kick start investments, 5 years of hard work by investees, then a few years for cash out, IPO or sale (preferably cash). There isn't the timeframe in there for R&D.
- graycat 13y ago
  I never said "blue sky". VCs won't fund research if it's done, written up, in a peer-reviewed journal of original research, and implemented in software written, tested, timed, and documented. Period. No research, of any form, any time, in any case, period. Stop. End. Instead, VCs, and their limited partners, want to see 'traction' in the market. If the traction is from some research, then that's a net negative because (1) it would be something it might be important to evaluate, more difficult to evaluate than just routine software, (2) might make the CEO more difficult to replace, (3) would let the CEO have an easier time telling the Board that they don't understand the business. Instead, VCs want a nice, simple, little business, with traction significant and growing like a weed, in a gigantic market, that can become a company worth $100 billion, that anyone, even a VC, could understand, run by a CEO who tends to drool a little and can easily be talked into signing a bad business deal. "Blue sky" has nothing to do with the situation.