WINE: The VC Innovation Index
No. VC funds that back startups don’t innovate. But venture money and innovation are inextricably linked. Like magnets. The question is how? Well, I think I reverse- engineered the answer: WINE.
I had planned to call this something banal, like the VC Innovation Index. But, remembering the great marketing the Economist did with their Big Mac Index — their gauge of relative prices globally based on the prices of McDonald’s signature sandwich. I opted for WINE. Right now, it’s short for the Why Innovation Needs Excitation. But feel free to offer up better acronymical options. I think I figured out how to turn comments on.
When it comes to interesting (and fun) things to write about, the last few weeks have been a grind. I feel like I’m doing a disproportionate share of the lifting. I shouldn’t be creating; I should be writing about creations. But there aren’t many. Innovation is on the charts. Which isn’t nearly as good as it sounds.
Which seems incongruous to me. I’ve argued for a while that we’re entering an exciting new era. I’ve said that the AI revolution is akin to the analog to digital transformation ushered in by .coms in the late 1990s. My thesis is wrong. It’s funnier if you say “wrong” like Marisa Tomei did in My Cousin Vinnie.
In 1998, venture funds invested $19B. Last year, VCs invested $170B. For context, the $19B would have become $37B if it had just grown as quickly as everything around it. Which means, money for VCs grew 4½ x faster than just about everything else around it. Yeah, I know too many numbers. So, I made this chart.
You’d think with all that extra money, we’d be swimming in cool new ideas. Or, flying around in hover cars. But we’re not.
Don’t take me stilling drive a car with a manual transmission and a fake wooden gearshift knob as proof. The proof comes from the lousy returns VC funds have been posting.
Funds from 2015 haven’t returned all their investor money yet. It’s been nearly a decade. Three quarters of funds raised in 2020 and 2021 will not return money either. Top quartile funds with a 2021 vintage will likely just return investor money. That’s a lot of years with no returns. The numbers come from a X post from Harry Stebbings. And, yes, VC types really do talk about funds in vintages.
I was a VC back in the .com era. In five years, we gave our investors back about twice what they put in. Which is about a 14% annual return. At the time, investors could buy U.S. treasury bonds and about 5½%. We were nearly a top quartile fund. Which meant we outperformed three-quarters of other funds. Still, for venture funds vinted in 1998, 14% was like uncorking a Beaujolais. Easy and fun. But unassuming and dismissible. In a very sommelier-word, “Meh.”
That’s when it hit me. VC returns are a fantastic proxy for innovation. The more they back innovative things, the better their returns. So, it follows that when returns are woeful, innovation is equally sucky. A decade of lousy returns adds up to a lost decade of innovation. Especially in tech. And since tech is so intertwined with media it’s been pretty boring here too.
What have we seen? Really? Is search appreciably different now than it was a decade ago? Social media? Podcasting isn’t new. We’re seeing more streaming. Which – at best – is more evolutionary than revolutionary. Ad tech. Yeesh, no. Has advertising changed? Nope. Websites? Apps? The App Store? Other than more memory and a higher-res camera, is your phone appreciably better? Your computer? Have the business models changed?
So, the WINE Index.
→ Unless you’re my math friend, Matthew, who I know will check to see if this makes any sense, feel free to this explanation.
The best VC returns cap out near 20%. The worst are (in theory) a loss of all investor capital or -100%. But, we’re going to put in a floor of zero. That gives us a 20-point range. A fund with no return gets no points. A fund with anything over 20% return gets 20 points. Divide actual return the points by two and multiply that by ten. Or, just multiple by 5 for convenience. That gives you a nice number between zero and one hundred. Good funds from the 1998 vintage returned 14% to investors. Their score would be a 70. Take the square root of that and multiply it by ten. It’s a simple shortcut to adding some curve that a benevolent stats prof did for me. So, 70 → 83.7.
→ And we’re back.
The WINE VC Innovation Index for 1998 vintage funds would have been about 84. Today’s WINE VC Innovation Index is damn-near zero.
A little more whiny than WINE-y.
It’s a good reminder that VCs don’t innovate. What they want to invest in tells creators what they need to build to get backing. And, for too long a while, those wants have failed to innovate. So, as the massive amount of VC money takes less risk and, like lemmings, jump off the same cliffs to invest in the same things, we are starved for innovation.
Too complicated? Let’s see if I can explain in simple terms.
There’s this neighborhood. And, right here, in the middle, there’s this group of innovators. Let’s call them the New Boys. And on the perimeter, there’s this bunch of negative guys. Always saying stuff that bums you out. Like, “The market isn’t big enough.” Or, “There’s too much risk of adoption.” These negative guys feel self-important. They call themselves the Elected Ones. They’re just circling around looking for deals. But they don’t do too many of them. So, we get block after block of nothing.
Maybe the New Boys need to find a new way to get things done. Find people in companies who will champion their ideas. These corporate guys are professionals. They call themselves the Pros.
Who knows, maybe a new Pro Innovation paradigm could be magnetic. Then, maybe I could stop whining about a lack innovation.