"Many venture capitalists are up in the arms because their returns are down, their funds are drying up, and there appear to be a declining number of entrepreneurs pursuing big ideas."
I will try to give explain how to reverse "the decline in big ideas":
First, I should state some context:
(A) The goal of a VC investment is to make money within a few years for the VCs and their limited partners which are usually pension funds, university endowments, and a few others. Here I stay with this goal and set aside other goals such as 'improve society', 'save the planet, environment, rain forest, farmland top soil, coral reefs, whales, genetic diversity of flora and fauna, and poor people'. I am willing to leave these goals to Bill and Melinda Gates.
(B) As VC Mark Suster has reported on his blog, in the past 10 years VC returns have been poor, that is, commonly negative and on average low compared with other 'asset classes' or with history in finance. Maybe as few as 20 VC firms in the US now have a good 10 year track record for their limited partners. Returns have been so bad that
"Many venture capitalists are up in the arms"
is easy to believe.
(C) US venture capital concentrates in just two broad areas (a) 'information technology' and (b) biomedical technology. Here I concentrate on (a), 'information technology'.
With the VCs concentrating on 'information technology', I agree that they should do that. That is, broadly, computer hardware, infrastructure software, the Internet, and, now, mobile devices are enormously powerful and not yet nearly fully exploited, and, net, the big opportunity to make money.
With this context stated, I move on with two points.
First, What the VCs Are Doing
I believe that what VCs are currently doing is close to just silly and fully explains their poor financial performance. So, here is what they are doing:
Yes, a current joke is that VCs (and their entrepreneurs) are concentrating on mobile, local, social, friending, liking, linking, sharing of text, still images, and video clips.
More generally, and not just a joke, it has become clear that VCs expect that there is a 'business idea', to parody, 'Facebook but only for single cat lovers' or a 'matchmaking site for employers and job hunters'. Such a 'business idea' is to be expressed in just a few words, and everything important about the idea is supposed to be just obvious.
It is such ideas that have led to the contemptuous remark "Ideas are easy and plentiful. Execution is everything.". Well, with only such simplistic ideas, of course, execution is all that's left and has to be "everything". Bummer. I will argue that with a 'good idea', at least with good planning before execution, execution should be routine. The need for routine execution and the ability to do it are common on Main Street all across the US.
Then for the 'barrier to entry', in the words of Fred Wilson, that is supposed to be from a "network of engaged users".
All the rest of the work is supposed to be routine user interface design, software, publicity, and, in the case of major success, server farm engineering.
Then VCs evaluate such a project based essentially on just 'traction' that they want to be significant and growing rapidly. I.e., they want another Facebook.
But here what the VCs are doing is just silly: The VCs are asking far too much from the 'business idea' and its short description and from just 'traction' and are ignoring any more solid evidence of a good project and good investment. Moreover, in the sense of the HBS article of this thread, what the VCs are doing gives no real promise of identifying with any significant accuracy the coveted "big ideas."
In blunt terms, the VCs are lacking any more solid means of project evaluation.
Maybe with such processes some entrepreneur can find another Facebook, but I believe that the good opportunities are elsewhere.
Second, Much Better
Here is my suggestion for something much better that I believe is so far neglected by VCs (and their entrepreneurs). I suggest the following broad steps:
(1) Market. Pick something big. Identify a market where can get a lot of money from each of a few customers or a little money from each of hundreds of millions of customers. Something of high interest to, say, 80% of all the Internet users in the world should do nicely!
(2) Problem. In this market, find a problem where a much better, or the first good, solution clearly promises to achieve the goals of money in (1) -- a lot from each of a few or a little from each of a lot. Here "clearly" has to be quite solid and not just some intuitive guess and not just early traction.
So, e.g., what's wrong with another mobile, social, liking, linking, friending, sharing Web site is that it is just not clear that such a site will get tens of millions of users. It just isn't clear. Instead, it's a long shot, a shot in the dark.
Note: If in the market selected in (1) can't find a suitable problem, then return to (1) and pick another market. However, if the market is a significant fraction of all the Internet users in the world, then there MUST be a suitable problem somewhere in there, so keep looking!
(3) Research. Do some research to enable, in the sense of 'secret sauce', the desired solution as in (2).
There are some business advantages here: First, the research can enable a much better solution, that is, one the customers like much more. Second, the research can create a technological barrier to entry.
Note: If can't find suitable 'secret sauce', then return to (2) and pick another problem.
(4) Software. Implement the solution in software on a Web server, and deliver the solution via Web pages over the Internet.
Note: If the solution needs more than just such software and a Web server, then return to (3) and find another solution.
(5) Execution. Go live, get publicity, users, and revenue.
Note: Here the crucial work, and the work to be carefully planned, executed, and evaluated, is supposed to be in steps (1)-(4), and step (5), execution, is supposed to be routine. This situation is in wild contrast with the usual VC view that "Execution is everything".
Well yes: When the start is just a simple 'business idea' with nothing more to recommend it, then, yes, "execution" is all that's left and "everything". But such execution for "big ideas" is just vast goals with half-vast planning, a long walk on a short pier, ready, fire, aim, and sloppy work that explains the poor financial returns.
Where the VCs get off track is failing to take seriously (1)-(4).
Here's where the entrepreneurs get off the track: They don't know how to execute step (3) Research.
What can we say about such research? Well, after the research, the rest is just routine software and routine use of computing, software infrastructure, the Internet, and server farm engineering. So, basically the software just takes in some data, manipulates it, and puts out results, and the research is for the manipulations.
Well, the manipulations are necessarily mathematically something, powerful or not, understood or not. There are various ways to do the research:
(A) We can hope that the data manipulations to be done could in principle be done manually; so, the software is to implement manual operations that are well understood.
(B) We could use intuitive or heuristic methods.
(C) We could use some well known, somewhat general techniques in artificial intelligence, semantic analysis, natural language processing, data mining, machine learning, etc.
(D) Or we could proceed mathematically. Here we start with some assumptions that appear to hold well in the real problem. The assumptions become hypotheses in theorems. The conclusions of the theorems direct the data manipulations. The software performs the manipulations. The 'research' is for these connections and hopefully for some new theorems (that, of course, need solid proofs).
Via (A)-(C), it's tough to know that have powerful manipulations and to know that they are powerful early in the planning.
Where entrepreneurs get off the track is following (A)-(C) and neglecting (D).
Another place the VCs get off track is ignoring (D).
I'll make one more point: Since VCs are lacking good means of evaluating projects, they have been using poor techniques and information instead. Net, the VCs have been in a small 'echo chamber' quite distant from powerful techniques and valuable information.
E.g., apparently the VCs get their understanding of what good projects should look like mostly just from recent successful companies and what they find in their e-mail in-box. So, they are trying to learn how to select "big ideas" heavily from copying old examples and looking at small ideas. By analogy, they are trying to learn how to evaluate new directions in medicine by reading labels on bottles of snake oil. Hopeless.
In strong contrast, major parts of our economy have long been quite good at good plans for being new, better, and/or first and, given good plans, executing with low risk.
My suggestion to reverse "the decline in big ideas": Entrepreneurs, develop solid plans for projects that have much higher potential. VCs, learn how to evaluate such plans accurately.