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Startup studio Betaworks started out five years ago as an investment fund for tech startups, backing companies from Tumblr (its first ever deal) to Path, Kickstarter, and Venmo. Over the years it has evolved into something very different (providing a solid return for investors in the process).

Now, the company builds things internally, acquires them sometimes, and kills them occasionally. The Betaworks “family” is a connected system, CEO and founder John Borthwick said at PandoMonthly New York this evening. They sometimes integrate with each other and they often learn from each other, sharing resources. The interesting thing is that many of the products Betaworks builds would be rejected by VCs. They would be dismissed as FNAC, or “feature, not a company.”

Building something only because it can become a business is not Betaworks’ primary focus. “I think [that’s] a stupid filter,” Borthwick said. “We’re asking can I change the world? Can I change the way people read with Tapestry? The way people play with Dots? The way people discover with Digg? Can it change peoples’ lives?”

The $1 billion question would have filtered out a company like Google, he said. “You couldn’t have said to Larry and Sergey, will this be a $1 billion company? They were just trying to navigate the Web.” So Betaworks’ filter is whether something has the potential to change peoples’ lives.

That’s not to knock VCs, he said. The venture model is an “incredible” model, but it has evolved from its origins of solving problems around hardware innovation and Internet infrastructure. It doesn’t do a great job with consumer web tools because it builds “tall trees.” He compared the ecosystem of venture-backed companies to a rainforest — there are big trees at the top and lots of fertile growth at the bottom but not much in the middle.

Often business models are forced, too. “All too often a business model is a tax on the user flow inside a product,” he said. Google’s business model of paid search results is so successful because it goes with the grain of the users’ workflow. Google invested a lot in making their search ads really good, he said.

As a result, venture capital wins are either blockbuster successes — the Googles of the world — and small little long tail wins — the acqui-hires. But little in-between. “That makes the system kind of unstable,” he said. “Having something in the middle is actually really good because it can build good businesses and a system for innovation.”