IEEE Spectrum: How Venture Capital Thwarts Innovation

["Dave Farber" <dave () farber net>]

------- 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>

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