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TECHNOLOGY REVIEW march 2005
From the Editor Jason Pontin
The Crisis in Tech Finance
Finance pays for new technologies, but �nanciers
and technologists are sometimes at odds.
Financiers are by their nature conser vative and
analytical: they speculate on the future performance
of markets, but the whole of their art is to make
speculation as predictable as human a�airs allow. By contrast,
technologists are ambitious and optimistic: their innovations are
applied science or engineering, but they believe their inventions
will dominate markets or create entirely new businesses. Much
of the business of technology �nance consists of the wooing of
wised-up �nanciers by ardent technologists.
But there is this paradox: while �nanciers are jaded, when
they fall for something, they fall hard. They lose all their natural
caution. I was the editor of the technology business magazine
Red Herring during the Internet boom, and if it is now received
wisdom that the venture capitalists and investment bankers who
funded that mania were the cynical promot -
ers of a �nancial euphoria, I never saw it. Fi -
nanciers loved the boom more than most
dot-com chief executives. But like disap -
pointed lovers, �nanciers were bitter when
their speculations proved unfounded, and
without income or more capital, many of the
companies that Red Herring wrote about
were, in the end, ruined.
The long winter of technology �nance
followed. After Internet and communications
company stocks collapsed in mid-2000, the
market for initial public o�erings of all technology companies
closed, too—and without an “exit strategy,” venture capitalists
couldn’t, or wouldn’t, invest in startups.
It’s been a long four and a half years. But 2004 seemed a kind
of re�orescence for technology �nance. Google’s wondrous IPO
in August excited investors, but Google was the least of it. Two
hundred thirty-three technology companies went public on U.S.
exchanges in 2004, raising $43 billion, compared to 2003, when
79 companies went public, raising just $16 billion.
So why am I not happier? Because �nanciers are still bilious
from the boom: they remain disinclined to invest in emerging
technologies. As we describe in this month’s special report,
“Tech and Finance 2005” (see p. 35), total venture capital invest -
ments in the United States in 2004 were up 8 percent over 2003.
That is all to the good. But worryingly, while the valuations for
later-stage startups increased in 2004, money for younger start -
ups did not. Venture capitalists are funding proven technologies
at established startup companies, especially those whose work is
relevant to Internet security, national security, and biodefense.
All of this would matter less if public companies were invest -
ing in emerging technologies. They are not. Over the last four
years, corporations have spent less and less on basic research and
development. Worse, the U.S. government is investing less in
new technologies, too. In the 2005 federal budget, R&D spend -
ing has increased 4.8 percent to $132.2 billion, but 80 percent of
that increase went to defense research—and most of that to new
weapons systems like ballistic-missile defense. This meant cuts
elsewhere: the National Science Foundation, for instance, saw
its R&D budget decrease by .3 percent to $4.1 billion in 2005.
Even the National Institutes of Health, long a favorite object of
federal largesse, enjoyed an R&D budget increase of only 1.8 per -
cent, to $27.5 billion—below the rate of in�ation.
Distraught technologists might seem only to be saying, Can I
have more money, please?—were it not for
one thing. The drought of venture capital
for early-stage startups, the indi�erence of
public companies to basic R&D, and the
emphasis on security by the government
have conspired to create what our report
calls an “innovation vacuum.”
The crisis can best be understood as an
exaggerated example of what economists
like to call the “transfer gap”—that is, the
failure of emerging technologies that have
been “pushed” (to use economic jargon)
into research by technologists to be “pulled” into commercial de -
velopment by �nanciers. The transfer gap occurs when �nanciers
demand more certainty about the future prospects of a given
technology than technologists can supply. When �nanciers feel
very cautious, as they do right now, the gap gapes wide.
One solution proposed by Michael Kremer, the Gates Pro -
fessor of Developing Societies at Harvard University , is for
governments to bridge the transfer gap by making “purchase
commitments” for the successful development of socially desir -
able technologies. The idea is pretty; it creates demand that
startups can satisfy without asking governments to make choices
better left to the markets . Certain of demand, �nanciers would
be ready to back risky ventures. Kremer suggests using purchase
commitments to create therapies for infectious diseases for the
poor world. Defense spending is a kind of purchase commit -
ment. Might it work for other technologies, too? Write to me at
jason.pontin@technologyreview .com. ■
Why am I not happier?
are still bilious from
the boom: they
to invest in emerging
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