What government agencies looking for innovation could learn from venture capitalists

A key factor that likely favors US startups over those in less developed economies is the existence of a thriving venture capital (VC) industry that enables bold innovation. In the spirit of the adage that government could learn a lot from corporations, here are some venture capital ecosystem practices and concepts that differ from those found in government, and which some government agencies might be able to adopt. According to a recent presentation by venture capitalist Rob Ness at a Government Analytics Breakfast Forum event sponsored by Johns Hopkins University and REI Systems, government agencies that seek innovation as a key part of their mission, such as NASA, the National Science Foundation, and the National Institutes of Health may find this useful.

SIMILARITIES BETWEEN GOVERNMENT AGENCIES AND VCs

  1. Learn what is happening. Government and venture capitalists are eager to discover new ideas for products and services, to understand the cutting edge of innovation. Government officials and VCs attend conferences and read new research with an eye for potential innovation. VCs also look for significant latent customer demand for products and services, while government agencies assess their mission and identify unmet needs that innovation could address.
  2. Choose innovators and ideas. Government and venture capitalists screen innovators and their ideas. Venture capitalists enter into agreements that provide funding and take an equity stake in a company. Government agencies typically award a grant, cooperative agreement, or contract for the development and demonstration of an innovation, but do not take an equity stake.
  3. Work towards success. Government and venture capitalists support innovators after they have selected them. The government provides funding through a grant or contract and may become an ongoing client, occasionally offering feedback, technical assistance and change requests. A VC offers funding, but can also provide strategic advice, introductions to key partners and clients, assistance in recruiting key personnel, and even office space. The definition of success, however, varies. A VC seeks rapid growth into an unoccupied niche with significant market demand (ideally a niche with patent protection or other forms of competitive defense that could, at least in theory, drive that business to an offer successful initial public). In contrast, the government seeks the development and demonstration of innovations that will contribute to the agency’s mission, often filling a key capacity gap.

KEY DIFFERENCES

  1. VCs aim to be against the grain. A venture capitalist looks for ideas and technologies different from those currently in use, or even those rejected by conventional wisdom. A good example is AirBnB. The common perception was that most people wouldn’t want to spend their vacation nights sleeping on a stranger’s couch. AirBnB, and the VCs that supported it, took the opposite view and improved the model (renting entire homes, not just sofas; setting quality standards and user ratings, etc.). Demand that no one else has recognized has allowed AirBnB to reshape the hospitality market; it now commands a valuation in the tens of billions of dollars. In contrast, federal agencies tend to choose the most meritorious innovation, but almost always within their mission and comfort zone.
  2. VCs ruthlessly discriminate in favor of a few investments. Venture capitalists only expect to provide sustained support to a few of the companies they fund – those that eventually gain dominant traction in the market. For the few winners in a given portfolio, VCs can provide additional funding, expert advice, and job candidates to help accelerate product refinement, marketing, and customer acquisition. The government, on the other hand, presumably wants every winner to succeed and can evenly distribute limited support among all winners, rather than trying to “pick the winners”.
  3. Venture capitalists and the government are looking for different kinds of value. Venture capitalists need a stake in the capital of the companies and ideas they select, and they want to be able to sell that capital in a limited time frame. Participation means that the fortunes of the VC and the entrepreneur are linked. Government agencies, on the other hand, do not take equity stakes and generally do not demand repayment of paid public funds. Instead, government seeks the value of innovations that provide better services to citizens, improve the functioning of our economy, or advance scientific knowledge. These types of value are often difficult to measure or value and take a long time to realize.

WHAT GOVERNMENT CAN LEARN FROM VCs

  1. Set aside money for “blue sky” ideas and contrary thinking. If a federal agency sets aside a portion of its innovation funding (for example, 10%) for innovations unrelated to the agency’s mission, especially counter-ideas, the agency may uncover ideas that it does not didn’t know she needed, but that have a big impact on her mission. And opposing ideas may have even more potential because they fit into a new but related mission that offers agency stakeholders and beneficiaries even more value than originally imagined. .
  2. Consider taking an equity stake in funded companies. The government has generally not sought to take stakes – in part for fear of playing favorites in the market. But as a result, it doesn’t derive as much value from its investments as venture capitalists, presumably because it asks too little in return. Of course, if the government takes equity stakes, it would have to be very methodical in providing arm’s length oversight and support – otherwise government-held equity stakes would give rise to real or perceived conflicts of interest or corruption. which do not apply to the context of the private sector of venture capital firms. For example, the government may require the allocation of an equity stake to an independent, not-for-profit entity that provides ongoing support to the business, while also having the ability to return profits and gains in value from equity that ultimately yields a direct financial return to the business. plublic treasure.
  3. Set an explicit expectation for failure and promote a “fail fast” mantra. The government may never be able to entirely avoid criticism from the media and listeners over its investments in innovations that ultimately do not produce the desired results. However, it can be helpful to manage expectations by establishing a projected failure rate in advance – for example, that perhaps 70% of early-stage projects funded by an agency are likely to fail. This could help create an environment conducive to celebrating success when it happens, while avoiding the penalty for failure that can discourage innovative risk-taking. The mantra “fail fast” is related to trying many things, but not investing too much in those that do not succeed (i.e. it is better to fail fast after a small investment than to fail slowly after prolonged long-term investment).

Authors:
Rob Ness is the general partner of venture capital firm Asymmetry Ventures.
Jeff Myers, Principal at REI Systems, is a government performance improvement expert with more than 30 years of experience working with local, state, federal and international agencies.

Jennifer Bachner, PhD, is director of the Data Analytics and Policy Program at Johns Hopkins University.

Ashley C. Reynolds