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Monday, March 28, 2011

Solutions in need of problems, and venture capital investing at university start-ups

I always find it interesting when I come across solutions to problems that I didn’t know existed, and apparently I am not the only one. This past week I attended a panel discussion for budding entrepreneurs, and finding solutions in need of problems seems to be one of the main goals of venture capital (VC) funds in Silicon Valley.

The institute I work at, The California NanoSystems Institute, houses a technology incubator for start-up companies coming out of UCLA. As part of the efforts to help these entrepreneurs (there are currently seven companies incubating) the institute has organized a series of panel discussions with experts in various areas applicable to start-ups. These panel discussions, the Thirty-Thirty Incubator Panel Series, feature thirty minute presentations followed by thirty minutes of questions from the audience. With a bit of pride, I must add that I created the ‘Thirty-Thirty’ name when the organizers were looking for something catchy to brand the series with. See past topics and video clips here.

The discussion last week featured three people from venture capital firms in Silicon Valley and Southern California. These panelists were discussing ways that start-ups can position themselves to get funding and giving insight into the thought process of investors.

One of my main takeaways from the discussion was how much the venture capital funds want to change the world. A couple times during the discussion panelists emphasized that they are looking for solutions to big problems; they don’t bother with iterative improvements. One of their favorite topics was companies that create their own market, providing a solution to a problem that people didn’t realize they had, or ‘greenfield’ investing.

The realist take on this subject would be that the highest returns on investment come from a company that pioneers and dominates a market. But there are lots of ways to make money, and it seems to me that these venture capital professionals are interested in greenfield investments for more than the potential money.

A very virtuous alignment seems to be in place with the agendas of venture capital funds. They are interested in gaining fame and fortune through their investments. One of the fastest ways to this fame and fortune is through funding a technology that a great many people will pay for, i.e. something that will really help people’s lives.

Another element that struck me was how people intensive the venture capital and start-up world is. I had thought that ideas and technology were the main focus, but that couldn’t be further from the truth. Entrepreneurs often can’t even get in the door with venture capital investors without the people skills to get a referral, apparently cold calls aren’t well received in Silicon Valley.

One of the panelists talked about how his favorite investments are in solutions in need of a problems. He explained that his firm is really good at finding markets for good ideas and developing businesses, but they need that raw idea to shape. They are constantly in search of people who have a good idea/technology in development, but who don’t know what their market would be. This development of an idea into a business is a long process though, and he stressed how vital it is for the inventor and the venture capital fund to work well together.

The incubator program at CNSI is very exciting for me. It represents a clear path for some of the great ideas from UCLA to make it out to the market. Before starting at CNSI I had no idea of the difficulties involved in transitioning ideas out of research labs. Without commercialization programs, great ideas, which are often supported by federal, taxpayer provided funds, would not be transformed into real products capable of making a difference in people’s lives.

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