by an IT-fueled speculative boom, followed by an economic bust from which the IT sector is just now starting to emerge. This section reviews the shocks to which the IT R&D ecosystem was subjected during this time.

The Rise of “Irrational Exuberance”

The term “irrational exuberance” is credited to former Federal Reserve Board Chairman Alan Greenspan. In a speech given at the American Enterprise Institute in 1996, Greenspan made a general observation about the difficulty of recognizing “unduly escalated asset values.” Few seemed concerned about the possibility of irrational exuberance or unduly high asset values as the excitement about the Internet created the dot-com boom. The initial public offering (IPO) of Netscape Communications Corporation in August 1995 symbolizes the beginning of this period. With the benefit of hindsight, those early years can be seen to have fueled a massive expansion and upgrade of the global telecommunications system and powered the adoption of the Internet, but when the bubble of excitement burst in 2000,1 a powerful jolt was inflicted on the IT R&D ecosystem.2

The introduction and adoption of the World Wide Web were predicated on the ubiquity of the personal computer. With intuitive browsers and simple mark-up language, the Web enabled millions of individuals and businesses to create Web sites that could reach hundreds of millions of people and to engage in commerce. Companies formed rapidly, raising venture capital at high valuations to pursue new Web-enabled opportunities. Entrepreneurs and investors were lured into adopting business plans with weak fundamentals and (at least in retrospect) objectives that did not create lasting and tangible customer value. And yet, despite the agony of the bursting bubble, the Internet changed the lives of hundreds of millions of people around the world.

Figure 3.1 shows the rapid growth in venture funding for IT start-ups, particularly in the software and telecommunications sectors, following the creation of the Web in the mid-1990s. (For comparison, biotechnology funding, which did not experience such extreme funding changes, is also shown.) According to data from the MoneyTree survey, the number of IT start-up companies receiving venture investments reached a peak of more


For a broad study of the 1995 stock market boom in the context of others and with respect to structural factors contributing to speculative bubbles, see Robert Schiller, Irrational Exuberance, Princeton University Press, Princeton, N.J., 2000.


The overall peak in terms of both the total number of venture deals and total amounts raised came in the first quarter of 2000: in that quarter there were 2,129 deals amounting to $28,414 million, according to PricewaterhouseCoopers/Thomson Financial/National Venture Capital Association MoneyTree Report historical data, available at; accessed August 20, 2007.

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