well-established companies such as Yahoo and Cisco will be able to maintain their R&D foundation during hard times, but it will be difficult for smaller companies, which have been a critical source of innovation. If these companies start to fail, the bigger companies could decide to use their resources to acquire smaller companies on the cheap rather than to invest in their own R&D.

Venture Capital

Venture capital grew enormously in the late 1990s, from less than $8 billion in 1995 to roughly $100 billion in 2000. So-called “angel” capital (direct investments by wealthy individuals) may have grown even faster. Reliable data are not available because of the private nature of these investments, but a 1998 estimate by the National Commission on Entrepreneurship put that year’s total at $20 billion, whereas the venture capital investment was $14 billion. The equity market also grew apace. The total value of IPOs grew from about $4 billion in 1990 to more than $60 billion in 1999. U.S. capital markets have slowed recently, as reflected in the sagging stock market, but their overall health is strong. Still, we should not expect to see the breakneck rate of growth that characterized the late 1990s.

We also have to look at where this money was invested. In the first quarter of 2001, even as everyone was talking about the decline in value of information technology stocks, 35 percent of venture capital investment went to Internet-specific companies, 19 percent to computer software and services, 15 percent to communications and media, and 12 percent to semiconductors and electronics, according to the National Venture Capital Association. Only 7 percent went to medical and health companies and 4.5 percent to biotechnology.

Given all the recent news about the sequencing of the human genome and the accompanying potential for significant medical progress, one might expect a vast inflow of investment for research. That has not been the case. The share of venture capital going to biotechnology has been declining steadily during the past 5 years, and no turnaround is in sight. In spite of the widely acknowledged potential of biotechnology, it cannot promise the enormous short-term profits that many infotech companies have achieved. A biotech drug typically requires 10 to 15 years to develop, costs up to half a billion dollars, and must navigate a rigorous federal approval process. That’s not the music most venture capitalists want to hear. Although the large pharmaceutical companies have the resources to develop biotech products, access to resources for the small companies is uncertain. The market research firm Pharmaprojects reports that there are 373 biotech companies that are developing only one drug. It is not clear how many of these firms will have the funds necessary to continue their research long enough to know if it could lead to a successful new product. The creation of many new biotech firms raises hopes for a cornucopia of innovation, but these hopes will be realized only if we are able to put resources in the hands of those with the breakthrough ideas.



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