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.
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  1. icon
    Daniel (profile), 11 Oct 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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