Beta-Rubicon Preparing Plan to Fight VC Vacuum (Ron Goforth Commentary)

I have tried in previous commentaries to avoid even the appearance of promoting Beta-Rubicon Inc., the company of which I am president. However, in dealing with the impact of risk aversion in the investment activity, it is the past five years of company business activity that provide the insights that I would like to put forward here for your consideration.

Please understand then my references to Beta-Rubicon in my comments here.

Beta-Rubicon’s original business concept was to provide expert and genuinely independent and expert assessments of technology. Those foreseen as needing this service were both members of the investment community, tech-centric businesses and entrepreneurs. Today these assessments are most frequently done as a complement to conventional due diligence practices (i.e., practices that are conducted as part of the investment decision-making process). Our service offerings have broadened considerably during the past five years but remain focused on technology issues.

As a consequence of involvement in this dynamic marketplace, the company has for the past several years closely tracked activities in and between the investment community and tech-centric business and entrepreneurial communities. There is a paradox therein: on the investment side, there is a $60 billion overhang (funds not invested in ventures) that venture capitalists need to get invested in order to secure the high returns that participants in their funds expect. On the entrepreneur side, there are serious difficulties in obtaining the funds necessary to build commercially viable enterprises.

What is going on that such an unfortunate situation persists? Is this just another manifestation of simple risk aversion in the investment community? Or are there more fundamental problems at play?

“Early-stage development involves not only high quantifiable risks, but also daunting uncertainties. When uncertainties are primarily technical, investors are ill equipped to quantify them. The due diligence that investors in venture capital funds require of managing partners and that angel investors require of themselves is intrinsically difficult — and getting more so as both technologies and markets become increasingly complex.”

That’s according to “Between Invention and Innovation,” a 2002 paper done at Harvard University for ATP and the National Institute of Science and Technology.

There is another critical factor that is rather cogently put forth in “Our Innovation Backlog,” a 2003 paper from the MIT Technology Review: “The private equity financing supply chain is badly broken.”

The national-scale problem is also recognized in the Harvard report to ATP-NIST:

“We should not be surprised that technology entrepreneurs experience an apparent shortage of funding while large sums in venture funds remain undisbursed. Efficient markets do not exist for allocating risk capital to early-stage technology ventures. Serious inadequacies exist in information available to both entrepreneurs and investors.”

To provide that kind of information was the founding idea behind Beta-Rubicon and remains a major part of its commercial services. Beta-Rubicon’s assessment services simultaneously address other problems recognized by technology investment (financial) experts:

“In most cases, the cost of due diligence is considerable. In order to be successful, one should be a specialist or expert in certain fields,” according to a 2000 I-TEC Seminar: Good Practice in Early Stage Technology Investment.

Today, the company’s virtual enterprise business model is not only cost-effective in providing this business service, it uniquely allows a targeted, broadly-based, and specialized expertise to be put to good use on the specific information needs of both entrepreneurs and investors.

Beta-Rubicon’s novel business model, its accumulated experiences with both communities, its business independence and emphasis on professional integrity, and its broad network of associated subject matter experts have not only made us aware of this national-scale problem but also perhaps uniquely armed us to do something about it. Beta-Rubicon is working to introduce a major new service soon that will impact on the problem.

While aversion to risk will continue to haunt the halls of the investment community, sound and objective information can serve to reduce its negative impact on economic development. It is our intent not to just continue to talk about these problems but to proactively do something about them — and to build an important new business activity around doing so.

(R. R. (Ron) Goforth, Ph.D., is president of Beta-Rubicon Inc., in Fayetteville, a firm that specializes in independent technology assessment, management and due diligence services for investors, private-sector enterprises, and public agencies. He may be contacted through the firm’s Web site at www.beta-rubicon.com.)