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Are These The VC Firms That Actually Fund Innovation?

Feb 18 2014, 1:06pm CST | by

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Are These The VC Firms That Actually Fund Innovation?

Venture capital firms in the U.S. spent $29.4 billion funding young companies last year. (That’s more than the national GDPs of about half the countries in the world.)

Some of that cash went to outfits like D-Wave , which builds quantum computers that are exponentially more powerful than their conventional counterparts. And some went to companies like Snapchat , which lets mobile users send disappearing photos with finger-drawn squiggles on them.

Now, the point of venture capital isn’t necessarily to spur innovation. It’s to make money for investors. But the assumption that VCs fund innovation is part of the glow of the job title. It’s part of the reason why they avoid the ire directed at their cousins on Wall Street.

And though I’d agree that “innovation” isn’t binary, there are certainly degrees to consider. A dozen Groupons or Draw Somethings probably won’t get us as far as a single Tesla or D-Wave. And if we care about real innovation, it seems a worthwhile exercise to figure out which firms are funding meaningful technology, and which are not.

I won’t pretend to do this comprehensively in this post. But I will point out one source which attempts to provide a rough proxy.

SBIR Source , a service from the data firm GrantIQ, tracks—you guessed it—SBIR funding to guide companies through the federal grants process. That’s the Small Business Innovation Research program, a multi-agency effort to fund cutting edge tech and research with commercial applications. The program doles out about $2.5 billion in grant money each year to worthy companies via 11 different agencies, including NASA, the Department of Defense and the Department of Energy.

The premise is that SBIR doesn’t fund apps and games. It backs serious technology and research, the kind of stuff needed to push civilization forward in industries like medicine, energy, transportation and agriculture. SBIR funding, according to GrantIQ CEO Darren Rush, “is a very strong indicator that companies are high tech or hard tech.” One example: SEMPRIUS , an SBIR-funded company that produces the tiniest solar cells in the world. Another: 23andMe , which sells genetic testing kits to the general public for $99.

“The idea here,” says Rush, “is, ‘Can we use this as a signal and suss out the VCs that are actually executing a portfolio around high-tech sectors?’” By tracking which venture firms invest in SBIR companies, GrantIQ provides a snapshot of the firms that are serious about hard science and technology. The company has put together a list of 50 venture capital firms , ranked according to the percentage of SBIR-backed companies in their historical portfolios and weighted according to the number of companies in each portfolio. (The list does not take into account overall fund-size, or the amount of cash distributed to SBIR-backed companies by each firm. Such metrics would likely produce a different ranking.)

It’s a collection of many of the lesser-known players in the venture capital world. Harris & Harris , for example, a publicly-traded VC firm (you read that correctly) tops the ranking. The firm has funded 16 SBIR-backed companies, including biotech businesses like Solazyme , which converts plant products to oils, and nanotech businesses like Nantero , a maker of carbon nanotubes for semiconductors. That slew of SBIR-backed portfolio companies hasn’t helped Harris & Harris’ stock though, which currently trades at around $3 a share.

Other firms placing highly on the list include In-Q-Tel , the not-for-profit venture arm of the CIA, and Kleiner Perkins Caufield & Byers , which ranks at No. 11 with 16 companies. There are a few more name-brands–Khosla, Google, Lightspeed and DFJ among them–but the rest of the list digs up an assortment of firms across the country, with some as far flung as St. Louis, Mo. and Wayne, Penn.

Of course, it’s not a perfect measure of the firms that are serious about innovation. But it’s a start.

Follow me @JJColao  and on Facebook .

Midas List 2013: The Top 10

Source: Forbes

 

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