&gt; We are, as ever, either at the dawn of a
golden age of startups and innovation, as
technology’s boosters claim, or soon we’ll
be shaking our heads that investors ever
believed the market for startups was as
big or fast-growing as they thought it
was.<p>Well, for at least 10 years now,
<i>traditional, mainstream</i> US <i>information
technology</i> (biomedical is different)
venture capital has been essentially stuck
in the mud due to a <i>dirty little secret</i>.
As a result, on average, <i>returns on
investment</i> (ROI) have been low, e.g., as
reported in Kauffman<p><a href="http:&#x2F;&#x2F;www.kauffman.org&#x2F;newsroom&#x2F;2012&#x2F;07&#x2F;institutional-limited-partners-must-accept-blame-for-poor-longterm-returns-from-venture-capital-says-new-kauffman-report" rel="nofollow">http:&#x2F;&#x2F;www.kauffman.org&#x2F;newsroom&#x2F;2012&#x2F;07&#x2F;institutional-limit...</a><p>and at AVC.com, the blog of Fred Wilson of
Union Square Ventures<p><a href="http:&#x2F;&#x2F;www.avc.com&#x2F;a_vc&#x2F;2013&#x2F;02&#x2F;venture-capital-returns.html#disqus_thread" rel="nofollow">http:&#x2F;&#x2F;www.avc.com&#x2F;a_vc&#x2F;2013&#x2F;02&#x2F;venture-capital-returns.html...</a><p>Here is, apparently, what the secret is:<p>It used to be that venture capital firms
could invest in a project described only
on a napkin, but this practice was brought
to nearly a halt.<p>How?  <i>Traditional</i> US venture capital
gets nearly all its funds to invest from
its <i>limited partners</i> (LPs) which are
mostly pension funds, insurance companies,
wealthy individuals, sovereign wealth funds
(likely Mideast oil money), hedge funds,
and not much more.<p>Well mostly the LPs are quite
conservative, invest only a tiny fraction
of their funds with traditional
information technology venture capital
firms, and, apparently, have a relatively
uniform <i>deal</i> with such firms.<p>The deal:  Invest much like private equity
investment, that is, in a company
evaluated mostly via standard accounting
except instead of revenue be willing to
substitute <i>traction</i>.<p>So, here&#x27;s the <i>recipe</i> for traditional US
information technology venture capital:<p>Look for a company (1) exploiting
information technology, i.e., Moore&#x27;s law,
computing, the Internet, the Web, the
<i>cloud</i>, mobile, etc., (2) with a novel
product&#x2F;service, (3) addressing a huge
market, (4) with traction significant and
growing rapidly, (5) that is desperate
enough for some cash to be willing to
accept onerous terms.<p>So, here are some of the weaknesses of
this traditional approach:<p>(A) Any <i>development</i> work, e.g., writing
software, needed for (4) traction has to
be already funded and done.<p>Result:  This part of the <i>deal</i> means
that usually the development work has to
be what a few guys can do on a diet of
Raman noodles, and that severely limits
what products&#x2F;services can be offered.<p>(B) The <i>deal</i> does not permit giving
weight to real progress in research or
technology; so, venture partners will not
attempt to evaluate such progress and,
indeed, nearly never have the background
to do, or even direct, such evaluations.
Again, the evaluations are basically to be
much like in private equity, that is,
based on traditional accounting.<p>Result:  The companies that get venture
funding are doing little or nothing to
exploit original research or technology.
Maybe something about a market niche, a
user interface, or a partner list is
novel.  But, from US national security,
there is now a history of 70+ years of the
astounding power of original research and
new technology, and, with the <i>deal</i> of the
LPs necessarily, that power is nearly
always neglected.<p>E.g., for a joke, venture capital would
have said:  You build and test the first
one, build and test the B-29, build a good
base in Tinian, and build a good base in
Iwo Jima for fighter escorts, and for 30%
ownership with BoD control, a full
ratchet, and 2X liquidation preference we
will chip for in half of the aviation gas
for the Enola Gay.  In other words, that
is <i>vulture</i> capital.<p>We should not expect <i>vulture</i> capital to
do much to bring us to<p>&gt; ... the dawn of a golden age of
startups and innovation ...<p>and it has not.<p>So, as a result of weaknesses (A) and (B),
the information technology startups are on
average much less valuable than they
should be.  So, in particular, there is an
opportunity to do much better, in
particular, to get much higher ROI.<p>AngelList and YC have a chance for this
progress and, thus, to <i>disrupt</i>
traditional US information technology
venture capital.<p>If the CSC in the OP is willing to
consider being an LP with a new <i>deal</i>,
then there is a chance of<p>&gt; ... at the dawn of a golden age of
startups and innovation ...<p>and much higher ROI.