Chris Dixon is fond of calling the VC industry the R&D department of the US. He did so on his blog, just a few days ago. I don’t mean to catch him up in a technicality, but I have to disagree with the D. The true power of what early-stage IT companies and VC funding do for the IT industry is allow (but not dictate) a separation of R from D.
For the sake of this discussion I’ll borrow the definitions for research and development from Henry Chesbrough’s book Open Innovation.
Research is fundamentally about the exploration of new frontiers, punctuated by occasional flashes of insight that lead to exciting new discoveries… These highly trained professionals are able to monitor significant research developments in their professional communities and then apply them to the company’s business.
Development takes the output of research as an input into its own process. It produces products and services that embody the research ideas so that they may be sold in the market. Development managers seek to identify, characterize, and then minimize risks in creating new products or services.
There is no doubt that any early-stage IT company comes from a good idea. Furthermore, every VC-funded IT company that has a favorable exit, comes from a good idea that tests well in the market. These two tasks together (coming up with a good idea and matching it to its market) are the role of research in a typical organization. The development of the product is another task, and not every early-stage or VC funded company moves in to, or all the way through, development. Let’s look at three successful types of exits and draw the line between R and D.
- Let’s look at the example of Agnilux. It was picked up by Google while it was still in stealth mode. They probably had a good idea (based on the founders’ history it likely had something to do with server chips). They MAYBE made a working prototype or maybe just a couple good designs, and Google snatched them up. In this example the successful startup never even exited research. They didn’t get anywhere near development but the way the VC/early-stage ecosystem works allowed them to research an innovative concept that may have received a VERY early red light inside any corporation.
- Let’s look at the example of Grand Central. The communications company came up with the concept behind Google Voice. They were a semi-successful company, just barely breaking even on charging international fees when Google acquired them. They took a very innovative concept all the way through the research phase and in to the development phase. The problem came when it became obvious that the product had more potential then Grand Central by themselves could possibly capitalize on. So, Google acquired a company that had done all of the research and some of the development and continued to develop the product. What used to be Grand Central now integrates seemlessly with my gmail account/address book as well as my Chrome browser and one day soon it will have skype like features too. In this example the ability of a good idea, already in development, to move through the market to the firm that will make the best use of it creates ideal innovation.
- Finally, let’s look at Google itself (the search part). With the code behind Google already developed (essentially, the research complete), Sergey Brin and Larry Page could have sold to any number of companies (Yahoo! or AOL for example) for development. Any of these companies would have benefited from having the Google engine driving their search. Instead, Google took on financing and moved in to development themselves. In this case venture capital saved Google from having to sell its ingenious innovation to a company that would not have made the most of it in development.
As I said at the beginning, it’s not my intention to get caught up in semantics, but I do think it’s worth noting that early-stage and venture capital industries, fundamentally, only supply the research that makes America tick. Who develops the great ideas that come out of this research is, and should be, decided by a market of developers with different ideas about what they can do with each innovation.