A brief thought, responding to a conversation about innovation in venture capital.

Responding to a train of thought around potential funding models for startups, returning to an old post about venture capital:

Venture capital, for one, has yet to deliver a scalable, viable funding and economic model to fit this new model of economic organization. The traditional high-risk, high-reward, high-touch operational and cultural model simply does not fit the micro-business economy, an economy of “lifestyle” businesses based on smaller interactions and smaller bits of value exchange, created out of the need to build lives, not necessarily a business to sell.

… How can venture capital adjust?

Sramana Mitra’s response, Blogosphere on Bootstrapping: Taylor Davidson:

Well Taylor, Venture Capital cannot adjust. It’s a fundamentally different model, and only bootstrapping works in this mode. But I am sure you have already reached that conclusion yourself. Potentially, though, corporations can fund strategic plays that encourage entrepreneurs to build businesses leveraging their platforms. Examples: eBay and Amazon could micro-finance online retailers; Google could micro-finance content ventures; SunPower could micro-finance solar installers; Salesforce.com could micro-finance SaaS plays on the Force.com platform. You get the idea …

Actually, I haven’t reached that conclusion. Traditional venture capital is ripe for creative destruction and reconstruction. All industries go through cycles of creative destruction and resurrection in response to industry and market conditions: why would venture capital be any different?

In fact, we’re seeing innovation: consider Founder Collective, First Round Capital’s Entrepreneur’s Exchange fund, RightSide Capital Management, or the variety of emerging venture funding models, all examples of bright minds attacking problems in venture capital as opportunities.

If we consider “venture capital” as the function practiced by the majority of venture capital firms currently in the marketplace, then perhaps we would reach the conclusion that the venture capital industry is fundamentally different and cannot adjust.

But if we consider how and why the larger “venture system” invests risk capital into unproven businesses, then it’s easy to see that venture capital, like all industries, has changed and adapted over the years, and will continue to do so.