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Venture capitalists and founders at a recent TechCrunch Disrupt conference. Are the those who disrupt about to get disrupted?
Scott Anthony, who runs venture investing for Innosight — a consulting firm founded by the founder of "disruptive innovation," Clayton Christensen — has applied the master's lessons to the venture capital space at Harvard Business Review's blog. Like a lot of folks, myself included, he takes a recent Kauffman Foundation report as his starting point.
And then he effectively deploys Christensen's best-known concept to explain why venture capital — and particularly big VC funds — isn't performing as well as an investment class as it has in the past. The way disruptive innovation works is that in an established industry, a new player will enter at the low end and wind up disrupting the major players.
A good example might be Japanese carmakers attacking first small motorcycles and later small cars, then moving up the food chain to make plenty of trouble for Ford and General Motors. More recently, you could argue that Instagram did this to Facebook by creating a lightweight mobile photo-sharing app that was so easy to use that it acquired 50 million users practically overnight.
Facebook co-founder and CEO Mark Zuckerberg poses at Facebook headquarters in 2007. The company has since become a rare great investment for big-time venture capital.
The Kauffman Foundation has released a new paper about the state of its own considerable historic investment in venture capital funds. The title, "We Have Met the Enemy...and He Is Us," says it all about the key revelation: that as an investor, Kauffman has made a terrible, terrible mistake putting money into VC. The foundation, which is endowed to the tune of $1.85 billion, is blaming itself for the sorry state of its VC returns, which have fallen off significantly from their 1990s highs. And it's demanding changes in the way that investors approach VC:
The data we’ve reviewed in this paper demonstrate that VCs are good capitalists. They act in ways that are consistent with maximizing their economic profits. [Investors] seem to be less-good capitalists, because they repeatedly fail to negotiate key economic terms that have a significant impact on their investment returns.