For an answer here, see

http://news.ycombinator.com/item?id=5353799

For a more direct answer:

Pick a problem that needs solving. For the
solution, use 'innovation'.

Then want the 'innovation' to be ideas, essentially
applied research, that can be presented and
evaluated usually just on paper. So, as in
peer-reviewed published papers, the ideas should be
"new, correct, and significant", and, for innovation
in business, powerful and valuable for solving the
problem. Moreover, we should be able to check these
criteria mostly just on paper.

Then we measure the innovation by the ROI of the
solution it provides.

Is that the only way to make money? No.

But this approach to innovation has one heck of a
good track record for delivering terrific solutions
for challenging problems via the US DoD since the
start of WWII, and there the batting average is much
higher than for information technology venture
capital.

Moreover, and definitely should not be lost, and for
70 years has been understood with great clarity by
both the US DoD and Congress, the real foundations
of such innovation are pure and applied research as
in our top two dozen or so US research universities
(where about 60% of the annual budget comes from NSF
and NIH for US national security and health care)
with more in Federally Funded Research and
Development Centers (the FFRDCs) and then more at
Raytheon, United Technologies, GE, Lockheed-Martin,
Boeing, General Dynamics, Hughes Electronics, etc.
In total, Congress authorizes big bucks for all that
work, and Congress 'gets it'. However, Silicon
Valley wants to laugh at research and then turn and
run away afraid of it.

US information technology (IT) venture capital has
had a 'business model': Wait for 'traction' to be
significant and growing rapidly but, still, for some
reason or other, the company still not very
profitable, and hope that then the founders will
need money for the 'big build out', hiring bizdev
and marketing people, setting up the sales force in
the 'channels', etc. for the 'execution', or be so
eager for "cash now" for 'the good life' that they
will sign a bad business deal. Alas, as reported at
AVC.COM recently, the ROI has been lower than an
index fund.

Also there is an incongruity: A small information
technology startup with traction significant and
growing rapidly is in a much better position than
millions of US Main Street entrepreneurs who make
it without an expensive 'build-out' with bizdev,
marketing, channel people, business expertise from
former management consultants, etc.

For venture partners able to evaluate innovation,
i.e., applied research, just on paper, YC is
exceptionally good. Then there's Wegner at Union
Square, Morgan at First Round, Metcalf at Polaris,
Bayless at Sevin-Rosen, and a few more. There are,
what, all together in all of the US, 20?

And then there is the list of venture partners who
prefer to invest in college dropouts.

In college, at universities, at several
laboratories, at GE, IBM, JHU/APL, and more, I have
worked with many people good at doing and evaluating
applied research. Alas in US venture capital, that
list of 20 is about all I can find that is
comparable.

With the ROI south of the index funds, it looks like
there will be some changes that Darwin would
understand.