I think a major reason this attitude exists, especially amongst engineers and scientists, is that almost everything in your life is presented as a top-down problem. Everything in k-12 education is presented this way. The school system itself is organized this way. When you’re young, your family is organized this way. It becomes much worse when you get to college (especially for those engineers and scientists) because you get presented with ever-more complex top-down problems that you must solve. And since engineers and scientists are smart people, they’re pretty good at developing solutions for this.

And so when they become voting, policy-interested adults, they apply (wrongly in my opinion) the same methods to the problems they see the government as presented with. Just put the police here, put the right people here, ratchet the budget up there, refocus our efforts and tada, you’ll have a good solution. They do not particularly appreciate the difference between the engineering problems of their education and a policy question that involves autonomous individuals. In fact, I’ve seen the “let the people involved organize their own solutions” method derided as “lazy” — “but what if they choose the wrong solution? What then?”

That’s a good question. I think there are two cross-cutting factors at work. On the one hand, as you suggest, people are going to be more inclined to take foolish risks with other peoples’ money, especially if they get a piece of the upside but none of the downside. But on the other hand, individual managers within a VC firm are going to be worried about their job security and reputation within the firm if they bet on losers. So you get ass-covering behavior: if a brilliant 22-year-old college dropout comes along with a clever business idea that seems like it came out of left field, a VC fund manager is going to be reluctant to say yes even if he thinks it’s a good investment. Because there’s a significant chance the firm will fail, in which case he’ll have to explain how he could have been so stupid as to fund a 22-year-old with a weird idea. In contrast, if a 35-year-old with a CS PhD comes along with an idea for yet another social networking site, an individual manager is going to be less worried, because (1) the entrepreneur has an impressive resume and (2) social networking sites are a respectable thing to invest in.

So I’m talking about a very specific kind of risk-aversion: a tendency to overestimate candidates with impressive resumes and conventional ideas.

This is related to another difference between VCs and angels, which is that angels tend to be successful startup founders, while VCs often have MBAs or other non-technical backgrounds. Somebody with a technical background and actual experience in a startup is going to be much better at telling the difference between a groundbreaking business idea and a merely weird one. Likewise, they’re going to be much better at judging how smart the founders are, since they’ll be able to ask hard technical questions. If you’re investing in an area you don’t know that well, you’re going to be less able to spot really breakthrough proposals and less inclined to take chances on out-of-the-box pitches.