What Have VCs Really Done for Innovation?

Washington Post (9/20, Wadhwa) – Back in 1986, when Bill Gates was still making sales calls, he pitched my group at First Boston on why we should bet the farm on Windows. Despite the risk involved, we gave his fledgling startup the deal. This wasn’t because of his financial backers (he didn’t even drop any names), but because we believed in his vision and nerdiness. In the same way, Google became a huge success long before the deep pocketed VC's arrived to ride Larry and Sergey's coattails. They simply had a great technology and winning strategy.

The correlation between venture capital investments and productivity growth was researched by Masako Ueda, a professor at University of Wisconsin-Madison…She found that VC investment actually lagged behind TFP growth by two years and later rounds of VC investments actually caused a decline in TFP. In other words, venture capital slowed down the innovation process. What’s more she found that delayed TFP growth is correlated with first round VC investment. In simple English, this means that money goes where the innovation is, not the other way around.

What we need to do is to apply the same rules to VCs – which they impose on their companies – force them to make tough choices and get their business models in order. And instead of giving the tax-breaks to the middlemen, let’s give these directly to the entrepreneurs who take the risks and create the innovation. It is the entrepreneurs who fuel the economy, not the venture capitalists or investment bankers.