VCs and innovation

I love the contrariness of the brief article by Masayuki Hirukawa and Masako Ueda: The tenuous relationship of venture capital and innovation. Here’s the conclusion:

The current financial crisis has shut off venture capitalists’ opportunities to cash in their investments by bringing their portfolio firms to public stock markets. As a consequence, they are currently hesitant to invest in young firms in the first place. However, taken together, the evidence supporting the positive impact of VC on innovation is weak at best. Some innovations, especially less profitable ones, may take more time to be commercialised, but innovation is likely to persist even during this downtime, thanks to scientific curiosity and enthusiasm.

Living in the Bay Area, you never hear this skeptical view of venture capital. There is certainly plenty of grousing about their wrong-headedness, arrogance, luck, etc. But their fundamental role in the ecosystem of innovation here in northern California is taken for granted. I think research like Hirukawa and Ueda’s should give pause.

That said, I have some problems with their definitions. There seem to be two measures of “innovation” at stake. First is the commercialization of patents. Second is productivity growth. I grant that both can help measure some innovation, but they are poor proxies for innovation as a whole.

Since we’re in Davos week, I can recall a particularly juicy Davos moment way back when. Competitiveness guru and Harvard professor Michael Porter was holding forth on some research he had done showing that Japan remained particularly innovative and competitive. His figures were largely based on patent output. The one CEO on the stage with Porter was then-CEO of Renault, Louis Schweitzer. Very calmly, Schweitzer pointed out that the biggest innovation in his industry in that era — the minivan — didn’t involve any patents. How did Porter capture that? He didn’t.

Most innovation that occurs in what Richard Florida calls the creative economy can’t be patented, and the contributions to productivity are extremely hard to measure. That may also make some innovations harder to defend commerically, but it makes them no less innovative.

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