[IP] IEEE Spectrum: How Venture Capital Thwarts Innovation
------- Original message -------
From: Steven Cherry <s.cherry@xxxxxxxx>
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@xxxxxxxx> <http://www.spectrum.ieee.org>
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