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IEEE Spectrum: How Venture Capital Thwarts Innovation
From: "Dave Farber" <dave () farber net>
Date: Fri, 01 Apr 2005 08:31:05 -0500
------- Original message ------- From: Steven Cherry <s.cherry () ieee org> Sent: 1/4/'05, 8:16 Dave, I think this article in our April issue would be of interest. Steven Business How Venture Capital Thwarts Innovation The tech bubble was a boon to start-ups, but it was a bust when it came to truly original ideas By Bart Stuck & Michael Weingarten Venture capital funds have swelled hugely in the past decade or so-and that's good, isn't it? Venture capital lights fires under scrappy and ambitious start-ups. It can help bring great new ideas to market, some of which go on to disrupt entrenched industries, spawn entirely new ones, perhaps even permanently change the world. Old established companies rarely do that. They're much better at making incremental innovations, because they generally have more to lose than to gain from disruptive technologies. Yahoo and Google came out of left field, not the R&D labs of Microsoft or IBM. The personal computer as we know it came out of Apple Computer, not Hewlett-Packard, itself the original Silicon Valley start-up. Cryptography was brought to market by new companies like RSA Security and VeriSign, not by AT&T. In theory, then, venture-capital-backed start-ups are the best engines of innovation. But are they in fact? With venture capital funding an order of magnitude greater today than it was in the early 1990s, now is an excellent time to ask: has all that funding over the past decade brought more innovation or less? As venture capitalists ourselves, we've had considerable experience watching our colleagues make investment decisions. We had our own theories about how best to turn money into innovation but reserved judgment on the industry as a whole until we could accumulate and analyze the data from what has been the most frenzied decade in technology history. Our methodology was simple. We examined 1303 electronic high-tech initial public offerings for a 10-year period ending in 2002. We limited ourselves to IPOs from the New York Stock Exchange and Nasdaq, which were ground zero for the telecom and dot-com explosion of the 1990s. We sorted out those that were VC-funded and compared them with those that were not. We rated them on a scale of 1 to 5, with 1 being the most technically innovative. [See sidebar, "Scoring Innovation."] We were shocked by what we found. Overall, the level of innovation during that decade was surprisingly low. Even more dismaying, it did not correlate well with VC funding: the level of innovation actually dropped sharply after 1996, even as venture funding was going through the roof. <more> http://www.spectrum.ieee.org/WEBONLY/publicfeature/apr05/0405vcap.html -- Steven Cherry, +1 212-419-7566 Senior Associate Editor IEEE Spectrum, 3 Park Ave, New York, NY 10016 <s.cherry () ieee org> <http://www.spectrum.ieee.org> ------------------------------------- You are subscribed as lists-ip () insecure org To manage your subscription, go to http://v2.listbox.com/member/?listname=ip Archives at: http://www.interesting-people.org/archives/interesting-people/
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- IEEE Spectrum: How Venture Capital Thwarts Innovation Dave Farber (Apr 01)