Who funds innovation?

First the good news: Technology innovation is returning to levels not seen since the start of the Internet boom. In the past few months, I’ve seen dozens of great product concepts, working prototypes of exciting hardware and unique software applications that will deliver real value to business. Each concept is carefully conceived and well engineered. The market analysis has been done, and each product meets a real and unfulfilled need in the marketplace. And to top it off, the entrepreneurs who designed these products are smart and determined.

Now the bad news: Each of these projects is unfunded and at best has long-shot odds of getting the capital needed to become a product.

In a marketplace fueled by innovation, it seems implausible that great ideas can’t find strong backing, yet that is the situation in today’s start-up environment. The venture capital markets are the last of the boom-gone-bust players to turn the corner to full recovery. In near lock step, venture capitalists have moved from the most risky early-stage companies to find safer harbors for their investment capital.

Investors are looking for entrepreneurs who have delivered success in the past. They are looking to invest in markets where the dynamics are well understood, the execution plan is clear and customers stand at the ready. When investors find someone like this, they take notice. The deal is less risky, and these days, there is a whole lot less risk in “risk capital” than there used to be. While no new venture is entirely safe, established entrepreneurs in established markets with known customers are opportunity enough without taking a flier on an unknown entrepreneur, moving into a new market segment.

This is a tough time to be raising money, especially for first-time entrepreneurs who are pushing hard on the envelope of innovation. These first-timers have difficulty capturing the attention of established venture firms, which have moved much of their focus to the relative security of later-stage deals. Even venture capitalists who package themselves as seed investors expect a start-up seed to be well sprouted before adding the fertilizer of first capital.

Traditionally, nascent companies would turn to angel investors to provide the capital to get them rooted. But many of the well-known angel networks simply aren’t making new investments right now. Individuals who lost significant net worth in the Internet crash are extremely cautious with what wealth they managed to hold onto. Thank goodness for low mortgage rates and the home equity loans that are supporting more than a few start-ups these days.

The irony, of course, is that many compelling new ideas are moving around the industry right now. Most of these ideas need very limited financing to bring them to early markets. Through sheer grit, some of them will break through.

Let’s hope so. The technology markets will be a whole lot more interesting with these products in them.

Shipley is executive producer of The Demo Conferences, a Network World-owned event that showcases emerging technology products and services, and a veteran technology watcher. She can be reached at chris@demo.com.