There has been much criticism in the engineering community in reference to venture capital funds stifling innovation. 1 Some of it is related to investing in start-ups with superstar management and some of this is related to the tendency of VCs to pursue incremental innovations where there are lower levels of risk. VCs are not interested in technology; they are interested in adding a business to their portfolio that has a good chance of generating above-average returns. They know that some start-ups will fail, and they rely on their knowledge and expertise and portfolio diversification to deliver a few successful start-ups. The point is that it is hard for the new entrepreneur to make a splash because there are no previous splash patterns. Start-ups with little experience usually rely on the founder’s money, family and friends, and a variety of other approaches to run the company (see http://brainz.org/startup-funding/ for an excellent overview of nonventure-capital fund sources). There are many opportunities to raise funds outside of professionally managed money and indeed that give the company’s founder a degree of control and flexibility that may exceed the benefits of securing funds that reduce flexibility and control and are accompanied by very high interest rates.
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