Does Venture Capital Spur Innovation?

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Yes, we wanted to protect our assets, but this wasn't the key motivator—it was to make the company more attractive to venture capitalists, who we knew put a premium on patents. After receiving venture capital, our only focus was on sales and marketing. Technology development became a second priority.

Duke professor Rebecca Zarutskie agrees that venture capital does not directly stimulate innovation. She believes, however that it is an indirect motivator. Her research showed that VC-backed firms in the U.S. have lower failure rates, faster growth rates, and higher IPO and acquisitions values than similar non-VC-backed firms.

What is the takeaway from all this?

Entrepreneurs shouldn't rely solely on feedback from VCs to judge the potential of their ideas. VCs provide valuable input, but could easily be wrong. Entrepreneurs need to understand what their market really needs and take the risk by bootstrapping their venture themselves (BusinessWeek.com, 2/13/06. This means learning the basics of building a product, iterating through the development process until it is right, developing a business model that works, and assembling a solid management team (BusinessWeek.com, 5/31/06). Once all this is in pace, venture capital might follow (BusinessWeek.com, 7/17/06).

Policymakers in regions across the U.S., whose economic growth strategy centers on attracting venture capital to their areas, need to rethink this strategy. VCs don't consider it their job to spark innovation. They will readily go where they see a hot deal, but won't take unnecessary risk. Instead, policymakers need to work to provide fertile grounds for entrepreneurship. This means they need to provide cheap infrastructure, health-care benefits for entrepreneurs (BusinessWeek.com, 4/30/08), seed-financing, and a better system for commercializing the research available in our universities (BusinessWeek.com, 6/15/07).

Wadhwa is Wertheim Fellow at the Harvard Law School and executive in residence at Duke University. He is a tech entrepreneur who founded two technology companies. His research can be found at www.globalizationresearch.com. .