I’ve recently read this article on BusinessWeek about how Google changed the landscape for VCs and innovation.

To sum things up, the article states that instead of encouraging innovation, VCs are looking for companies that can fill in some gap in Google’s portfolio (at least the portfolio they think Google is seeking for, since they don’t really tell anyone what they are doing most of the time).

This step alone can diminish innovation since less VCs will invest in things that cannot be sold as quickly as possible to Google (or some other one of the big giant such as Yahoo, Amazon, eBay, Microsoft and the rest)

The crazy thing about this is the fact that Google is not interested in big deals, at least not at the moment. Their largest deal, according to this article, was $102 million it paid for the online ad start up Applied Semantics Inc., which in hardly one of the biggest deals around.

VCs will now try to fund small companies that might interest Google, invest a few million dollars in the company and try to sell it to Google for about 10 times of what they have invested.

Sometimes (actually most of the time) innovation requires a bit more cash or a bit more breathing space. Now I know that creating an Internet startup doesn’t take much funds as it used to, but for the bigger changes, the bigger innovations in other fields in addition to software, the ability to innovate will take time and therefore money.

If some VCs (and I do hope not all of them) will only fund as little as they can while pressuring the company to be liked by Google (or any other giant for the sake of the argument) this might bring that company to do things that are not necessarily innovative in the way they wanted to do, but innovative to draw Google’s attention and get bought.

AFAIK about Google’s internal affairs, they try to promote innovation and encourage it, but the effect that is actually happening outside of Google is the opposite and Google cannot be entirely blamed for this, after all, they don’t force VCs to think this or that. VCs sees Google huge pile of cash and are trying to think how they can get some of it, which is usually good, but I think there is a place for VCs with a bit more vision, VCs that will not only make sure they generate profit for the people investing in their fund, but will also have the ability to recognize the right opportunity with enough innovation at the right time. Something that instead of doing quick cash by selling it will create a long lived company and, perhaps, a new market.

Perhaps there is a place for a newer VC model.

The new VC should have a few long term investments in companies that the VC (and/or the market) see the potential of becoming a big company with an influence on its market (perhaps even create a new market). In addition to that, the VC should have a set of smaller companies for “quick cash” – Companies that their best exit strategy will be buy outs by bigger players on the market.

This strategy will help (a) base the VCs reputation, since the VC is generating profit for the investors and (b) generate more money to be invested into the bigger more money consuming investments in the long term companies.

I’m not that knowledgable in how big VCs work (or even the smaller onces) and I’m sure there are a lot of such arguments going around inside the offices of VCs all around the world, but perhaps there is a place for us, the poor little engineers with lots of cool ideas, to be heard.

Perhaps by raising our voices and telling VCs that they are not there just to give us cash that we can spend it, they are there to help innovate – perhaps that will help change the mind set of some of the people there.