Is Irrational Exuberance Good For Innovation?

from the questions,-questions,-questions dept

With big name VCs worrying about the lack of meaningful exits (read: no real IPO market, and no, Google buying YouTube doesn't count), some are beginning to wonder if the continuing chill in IPOs is harming innovation by making it quite difficult to fund companies that are doing truly innovative things. While there are some mergers and acquisitions, they're still not all that common -- and as the article makes clear, mergers and acquisitions aren't necessarily the greatest way to drive innovation forward. Often the acquiring company is only interested in one aspect of what it has bought, and lets many of the other, more creative and innovative aspects fall aside. So, do we need IPOs to drive innovation? There are two schools of thought here. One is that all those IPOs, while they encouraged lots of investment money to go into new companies and new ideas, didn't really help innovation. All it did was create a bubble where the investment risk was shifted from professional investors (the VCs and their investors) to the public. When the bubble burst, it lost a lot of people a lot of money. However, the flip side is that, while any individual deal may be overhyped and bad, a bubble-like atmosphere with easy money flowing all around actually does help drive progress by allowing companies to quickly throw up many different ideas to see what sticks. Many of them will fail, often wasting millions of dollars, but the ones that come through it all and withstand the test of time are what drives the economy forward. In other words, with a free and open IPO market, a lot of individual investors get screwed, but the ability to easily fund even the most wacky ideas leads to some real progress.


Reader Comments (rss)

(Flattened / Threaded)

  1.  
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    Redmond, Oct 11th, 2006 @ 3:49am

    money, money, money

    when there is money to be made the VCs will buy in, it may be better for innovation as the funds will be more focused on the viable ideas rather than those with a 18 month exist strategy, and then die off.

     

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  2.  
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    Anonymous Coward, Oct 11th, 2006 @ 4:02am

    science?

    it all starts with crappy self-styled "scientists" supposedly "working" on the big three (nano/bio/IT), getting crappy supposed "research" done, to then be invested in by otherwise rational VC, on the false promise that there is potential in the supposed "reseach".
    Truth is, the people doing true reseach and inovation are few and far in between. The rest just good at using the buzz words.

     

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  3.  
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    tek'a, Oct 11th, 2006 @ 4:11am

    how many buzzwords do I need to get a few hundred million in financing tossed my way? Il think of something later.

    it will include Web 2.0 and.. umm.. Social Networking! and Nanotech. and its machine washable, walks your dog, teaches your children how to read and fire medium range surface to surface artillary pieces.

    buy now, and in this incredible offer Il send you Nothing, at no extra cost (plus shipping and handling) *some boxes may contain flesh-eating nanotech robots bent on world domination. if found, return to sender**.

    **do not get blood all over the UPS return label.

     

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  4.  
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    Daniel (profile), Oct 11th, 2006 @ 6:48am

    "Screwed?"

    I wouldn't say that the investors are getting screwed in these cases. They are knowingly making a high risk investment - one that is easily more honest than your average lottery (which guarantees that half of all money put in gets scooped out of the pot and put into government projects before anyone gets anything).

    And if there is any misunderstanding of the risks involved, it is more often the result of the false sense of security provided by SEC regulations that, while punishing businesses and investors, offers no hope of compensation - or really any promise of ethical behavior - from the companies they "regulate."

     

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  5.  
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    revan, Oct 11th, 2006 @ 8:09am

    strange science

    I dont think that it is real sciencee. I dont imagine that that strange.

     

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  6.  
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    Jo Mamma, Oct 11th, 2006 @ 10:08am

    Innovation?

    I'm not sure exactly *WHO* says tons of money and pointless IPOs don't drive innovation, but I certainly disagree with them.

    Capitalism is a kind of Darwinian exercise in survival of the fittest, and a I think that there certainly are new business models that emerged from the dot.com bust (ebay, yahoo!, Amazon). And the "investors" (who didn't really know what the hell they were doing, and therefore, I wouldn't even call them investors) who got "screwed" were asking for it.

    Personally, the most interesting thing I find about this area right now is how Google is treating this merger with YouTube. I've only read a little about it (can’t find much info on it), but from what I understand, they are going to acquire YouTube, and let it run on its own. If this is the case (which I’m definitively NOT sure of), then Google would be putting itself in a position of acquiring companies simply because they are good companies to own. This would be more along the lines of a Warren Buffet / Berkshire Hathoway type of scenario, and quite a change from Google’s philosophy of swallowing companies whole.

    I do know Google would like to emulate the long term outlook and successful strategy employed by Buffett (who wouldn’t) and have specifically stated such, so maybe this is their first step in that direction.

     

    reply to this | link to this | view in thread ]

  7.  
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    Anonymous Coward, Oct 11th, 2006 @ 11:39am

    Ironic

    When I minimized this window, it says "Techdirt Is Irrational"

    Heh. Im sure it doesnt mean anything.

     

    reply to this | link to this | view in thread ]

  8.  
    identicon
    Anonymous Coward, Oct 11th, 2006 @ 1:29pm

    Re:

    teaches your children how to read and fire medium range surface to surface artillary pieces.

    ahhahaha... i want one already, useful skills to teach your kids....

     

    reply to this | link to this | view in thread ]


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