As the Red Queen and Alice run hand in hand in Through the Looking-Glass, Alice notices that no matter how fast they run, the things around them never change their place. The Queen ruefully tells Alice that, in Wonderland, “it takes all the running you can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!”. This advice is the namesake for the Red Queen Principle (RQP), which states that organisms must constantly adapt, evolve, and proliferate not only to gain an advantage, but simply to survive in an ever-changing environment.
The rapid pace of change in the technology world has introduced the RQP to the venture space as well, forcing the venture model to evolve faster than ever before. As brand name firms are losing ground, new firms are emerging with agile models that better fit the quickly-evolving ecosystem.
Several interconnected factors pushed the RQP into play in the VC world (see a detailed video deck here). Arguably the most meaningful one is the dramatic growth in the number of early-stage startups, driven by a 1000x reduction in the costs of starting a technology company in just 10 years. This has opened up early stage investing to a wide variety of new players. Accelerators have introduced an entirely different funding model with a much higher equity to cash ratio, a perfect fit for this new reality. Micro VCs and crowdfunding platforms also emerged to support this growing, low-cost startup phenomenon.
At the same time, poor performance has driven 65% of the institutional VCs out of business within a decade, while a few, historically successful, funds have enjoyed massive growth in their AUM. In fact, in 2012, 48% of LP capital was funneled into only 10 funds. Such mega funds could no longer focus solely on late stage investing. As new distribution platforms allowed breakout companies to scale much faster, VCs had to shift upstream and engage closely with early stage startups. To deal with the growing number of startups, some VCs created data-driven filtration methods to maintain fast, accurate, inexpensive operations. Others have out-innovated their competitors by introducing completely new organizational models that support a larger, multi-stage portfolio.
Corporates, the third piece in this ecosystem, drove further changes. As executives realize they can’t outpace the swiftly-churning market, and as the lifespan of companies declines at an accelerating rate, executives have been running faster to avoid their own Kodak moment by collaborating with startups that can help them innovate more quickly. Corporate participation in large venture financings has nearly doubled over the past four years. Other big corporations, such as Target and Walmart, have adapted by launching their own startup labs; still others, such as Nikeand GE, are partnering with investors to identify new technology and strong talent. This phenomenon is likely to grow, creating an unprecedented opportunity for investors and entrepreneurs to form stronger ties with corporates, and leverage their core assets and balance sheets.
So what does the future hold for VCs?
They must keep running, and faster than ever. Nobody is immune from the RQP; and in an interconnected, rapidly-changing ecosystem, predicting where the market will be a few years out, becomes impossible. The answer lies in building a different VC culture: one that is agile, and has the DNA to take risks, innovate, and evolve.
The investors that thrive will have a culture of experimentation; where new models in research, investment, support, and value creation are developed, tested, and iterated upon. At the foundation of this culture is an internal team that is creative, proactive, and interdisciplinary. This should be coupled with a bottom-up culture: one that empowers the team and lets ideas percolate up. This type of culture is the driving force behind Google’s ability to continuously innovate in the face of rapidly changing markets. The new VC will need to adapt and innovate at the same pace as companies like Google.
With this in mind, over the past several years at Innovation Endeavors, we have been building a culture of experimentation and innovation. First, we built a strong entrepreneurial, interdisciplinary team. Our team is diverse in gender, age, nationality (most were born outside of the US), with each member bringing different life experiences and backgrounds to the table. Beyond their technology prowess, this team brings into the room–and into the decision making process–the diverse and global perspectives that truly reflect the changing world around us.
Our entire team takes risks and experiments with new models of investment, support and venture creation. This culture of experimentation helped us launch Runway, our pre-team, pre-idea venture creation program, out of which came companies like Lumo BodyTech. Runway has now given rise to Innovation Labs, where we create companies together with exceptional technologists (recently, we launched Deep Signal, a big data energy startup). Our team has also spearheaded a new approach to support–a participatory support model that uses unique online and offline platforms, curated environments, and services in order to focus our efforts on our founders’ most current needs. This model helps our founders access and leverage the knowledge and resources which exist within our community of over 120 founders, all in an effective and cost efficient manner. To do this, we’ve built a proprietary platform that all of our founders can log into, to access the network of anybody else in the community. Curiosity Camp, where over 120 founders, creatives, and business leaders ventured into the woods for 3 days of collaboration and camaraderie (and no cell phone service) also came out of this culture of experimentation.
As with any startup forging a new path, we can only take steps forward and learn along the way. One thing that is clear to us at Innovation Endeavors is that in order to keep evolving, we must ensure that we remain agile and creative, that we keep learning, and that we’re always trying new things. To do this, we will continue to work closely with our founders and industry partners, and ensure that our team is continuously exposed to new ideas and perspectives. Our team will approach it all with open minds, curiosity, and humility. While we can’t predict the outcome of the RQP in the venture industry, we are certain that things will continue to transform, faster and faster.
This blog will be an addition to our efforts to share ideas and learnings. We see it as a platform for collaboration–a place for us to share insights from our community, and to solicit thoughts from a broader group of developers, marketers, creatives, and industry leaders. It will be a way for all of us to share ways we can evolve and experiment. Our Red Queen moment has arrived, and we cannot simply run in place. Venture Capital must innovate or die, because our environment–our Wonderland–is rapidly changing.