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Subject:  Is VC Investing Going to Change? Date:  10/17/2002  10:07 AM
Author:  Lokicious Number:  8003 of 10421

http://www.smalltimes.com./document_display.cfm?document_id=4836

Interesting piece from Small Times concerning nanotechnology, which I thought might be of interest, here, because of implications for broader investing and economic policy issues. This follows an earlier (recent) piece in Small Times in which the manager of a small venture capital firm siad, "we invest for the IPO" (i.e., we don't care whether the company floats or sinks, as long as we can get a lucrative IPO and get out).

I have long been screaming that the root source of all the frauds and bubbles and economic schizophrenia is too much money looking to make a killing in the short term, through unsustainable swings in stock prices. A lot of the worst offenses were from IPO investment banking scams involving start-ups, which basically provided oportunities for VCs and insiders (as well as those getting special favors at the start of the IPO, itself) to make huge profits with companies that were little more than shells. Gobs of money was flowing into VC "investing," because a quick IPO allowed a quick get-away, without worrying about if, or when, the company would turn a profit.

VC investing is absolutely essential for a well-working capitalist economy. Up-starts are the driving force behind innovation and competition—Xerox's "think tank" invented the internet (not Al Gore), for example, but the company's executives didn't get it or didn't want anything to get in the way of the copying business, and it was left to start-ups to push the thing into reality. The inventors and entrepeneurs who are the innovators, their employees who work for less than they could get elsewhere for a piece of the future, and those who take risks to supply them with working capital, deserve outsized returns on their investments in time or money.

But start-ups, in most areas, cannot become successes overnight. The "investing for the IPO" syndrome is really a perversion of VC investing, in which the incentive is to do a modern day version of the old horse-trader (or used-car salesman) trick of doctoring appearance. As this article suggests, innovations in such areas as nanotechnology are going to require sustained and ongoing high risk investment. That's going to require a change of attitude (actually a return to traditional VC investing), and given that VC money has all but dried up, it is time to look at some policy and tax changes to make long-term VC investing very attractive, short term VC scams impossible, and unproductive high risk/high return options (like big-league day-trading) more risky and less lucrative.
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