VCs are getting a lot of flack these days, for a number of reasons. (See the discussion on Techcrunch http://www.techcrunch.com/2008/11/12/a-scary-line-has-been-crossed-for-vcs/ ).
I think what is needed is a new type of investment fund; I'll call it the 'annuity investors'. Like VC funds, it would invest in technologies that respond to a current market need. Unlike VC funds, it would invest in businesses that promise a steady flow of revenue. Small and steady trickle of profits wins the day.
Why the need?
VCs cannot, by their nature, invest in "sure bets" that use established technologies. I hadn't been aware of that until a presentation yesterday at HBS, where Nick d'Arbeloff (Executive director of the NE Clean Energy Council) answered questions from the audience that asked why VCs were not investing in proven technologies such as geothermal heat pumps and heat and electricity co-generation. The answer: there isn't enough new proprietary IP in those fields to justify VCs' investments. Remember the funders of VCs: they invest in VC funds as one buys a lottery ticket - high risk, high odds of losing, but if you win, you win big. VCs are their risky investments. Annuities and bonds are their safe investments. If VCs started investing safe but steady, for their investors, they wouldn't be VCs anymore.
However, the market needs investors who will fund start-ups that are revenue-based, not exit-based.
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