Innovation is the solution to our most serious problems. We must do more with less in new ways . However, there are significant impediments to innovation as author and entrepreneur Sramana Mitra pointed out in her recent article an Innovation Conundrum. Much of this relates to the distortion of the relationship between risk and return.

Our capital system is a case in point: it compensates speculators disproportionately above creators. Compounded by significant risk-aversion, venture capitalists are acting like bankers, and Wall Street remains obsessed with quarterly results discouraging long term R&D. Hardly an environment for innovation. In distributing capital the middle men of Wall Street have been grossly over compensated for the service they provide - taking one group's money at one price and selling it to another group at a higher price. VC’s had been getting outrageous compensation in management fees, even when generating negative returns. As with many industries this is unsustainable because there is no value being generated. More importantly it drives away the opportunity for innovation because the need for immediate return and payment of middle men trumps the patience development requires and the rewards given to those who create it.

Eric Benhamou, former CEO of 3com recently commented that, “The preferred, risk-limited model of the venture capital industry will leave many important problems unsolved, many large-scale opportunities unaddressed and many radical innovators unfunded.” However, there is hope.

"A willingness to take intelligent risks and try something new is critical to both innovation and entrepreneurship. But the last decade has seen an increasing focus on short-term returns through risk taking without questioning or transparency to even understand the real level of risk. As a result, we replaced the foundation for real economic growth with the illusion of prosperity," writes Judy Estrin, a long-time entrepreneur and author of Closing the Innovation Gap. In the end a new system will emerge with the rewards of prestige and money increasingly going to the value creators, not the speculators. See Judy's brief outline of thinking about the Innovation Gap.

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