On Monday night, I attended a panel of venture capitalists and angels discussing the impact of the economy on the investment community. One of the most important points of the night was there are three major areas of investment and innovation driven by the venture capital industry that have the potential to drive economic recovery: IT, health care and green tech. The government is funding quite a bit of development in all three as well with the allocations in the budget and the stimulus plan.
The figures from the National Venture Capital Association are staggering . Below are the figures by sector of investments in 1995 and 2007 in billions of USD.Biotechnology: 828 4,500
Industrial/Energy: 544 4,651
Media & Entertainment: 916 2,039
Total: 7,995 28,932 The total amount of investment has increased by 400% over the past 12 years and for these three highlighted categories varies between 200-900% increases. Huge amounts of capital are furnished by investors. To what end? The result of this is a much faster pace of innovation. Like in evolutionary biology, startups tend to form from several cells (engineers/product managers) defecting from the parent organism. They attempt to create a new business using some of the existing DNA, but modify it to try a new combination. If it’s successful, that DNA (business model) replicates and grows, thus spawning more startups. The faster this process occurs, the faster evolution/innovation occurs. Viroids are a great example of record-setting DNA mutations that enable very fast evolution. In the case of venture capital, more money given to more startups means faster innovation because each startup, whether a failure or success, provides some additional knowledge about the viability of a mutation.
In practice, these additional billions of dollars have enabled twice as many startups in 2008 to attempt to prove their hypotheses as in 1995.
This is why private investment in ventures is critically important to the pace of innovation in the US and a key to our recovery.