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Are we investing in innovation?: A look at venture capital screening

Investing in Innovation

Missing the mark with innovation investing

I was recently re-reading an article done by Harvard Business Review highlighting the personality traits of entrepreneurs. In comparing managers versus entrepreneurs, the article articulates that “managers are often selected by their superiors for their ability to execute and deliver high-quality and low-variance results for a given set of directions rather than seek out original solutions.” 

This quote was so profound to me when I read it and made me think of my own lens of venture investing and deal screening. I have been fortunate to be in many due diligence meetings over the last few years. I can recall my journey from merely listening to other investors ask questions, to eventually leading due diligence screening sessions. When I reflect on that now, it strikes me that as we become more experienced at deal screening, we rely on knowledge of things we’ve gained, like good business models, team dynamics, or go-to-market strategies. 

Now while these are the normal criteria to look for and develop, it begs the question of whether our experience also makes us less able to appreciate the virtue of something novel and its ability to be disruptive in the market. 

When we apply the quote from the HBR article to VC deal flow screening, it would appear that our due diligence process creates the selection of a managerial venture; that of incremental improvement, but overall- low variance, and therefore low risk to invest in. 

Perhaps when we think of the grave disparities among those who get invested in and those who don’t- it has less to do with tangible things we think about like expertise and traction- and rather the founder’s ability to articulate a solution that looks familiar to us; and therefore gives us confidence in a perceived low chance of failure. But before there was Uber- rideshare seemed like a crazy idea! A B2C business model with low transaction value, high customer churn, unparalleled liabilities with unknown strangers driving their own vehicles–why would anyone invest in a company like that when compared with so many deals that give us more confidence and look like what we understand? 

I recently had the pleasure of connecting with Elizabeth Dowell, founder of Lark Academy, and spoke to her about the state of education in America. Elizabeth Dowell has studied curriculum design and has written extensively about the historical creation of education. Her drive to create something radically different and to re-examine the purpose of schooling and education became the foundation for the IDE Program at Lark Academy.

My conversation with Elizabeth resonated heavily with the idea of sameness and the inability for us to utilize existing systems to filter for true innovation. “Education teaches us the right way to do things…but that is the antithesis of fostering innovation,” Elizabeth said during our talk. 

I’ve seen this play out countless times when I’ve run a Design Thinking workshop utilizing the IDEO framework. Those who have the least indoctrination into formal education are quickly able to grasp the ideas of creative thinking and very quickly spout wild and crazy ideas. Those who struggle the most with developing original thoughts are those who have succeeded in mastering our education system– myself included.

Innovation implicitly requires difference. But how can we ever filter or look for it- when all our systems are designed to compare new ideas to existing benchmarks and metrics?

— written by Himalaya Rao-Potlapally, Director of the Black Founders Matter Fund

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