Technology spending is up, fueling profits and growth for companies ranging from Apple to Zynga. Might a new tech bubble be brewing?
Parallels with the late 1990s are, by luck or design, tenuous. Stock prices are buoyant, but there are no stratospheric price-earnings multiples or wild tales of business plans being scratched out on napkins at lunchtime and financed the same day. Although U.S. venture capital investing rose last year for the first time since 2007, to $21.8 billion, it was a far cry from the record $98.6 billion in 2000, as tracked by the PricewaterhouseCoopers/National Venture Capital Association MoneyTree reports, using data from Thomson Reuters.
But one font of innovation closely associated with the 1990s — the business incubator — is very much alive and, if anything, has been improved by some cautionary lessons from the boom.
Incubators are organized R&D hubs that tend to be, but are not exclusively, technology-oriented. Typically funded by or vying for seed capital, they are often located in laboratory or shared-office settings in or near universities. Some benefit from government largesse, the most famous example being the Defense Advanced Research Projects Agency, which laid the technical foundations for the Internet in the 1960s and ’70s.
As that history suggests, and as Josh Lerner, Jacob H. Schiff Professor of Investment Banking at Harvard Business School, has pointed out, incubators predated the dot-com boom, but they also contributed to its excesses. Lerner’s 2009 book, Boulevard of Broken Dreams, criticized governments’ attempts through incubators and other means to stimulate start-up businesses. Lerner writes that for each government-backed success, from Silicon Valley to Singapore and Bangalore, “there have been dozens, even hundreds, of failures, where substantial public expenditures bore no fruit.”
Private sector start-up initiatives have their own law of averages. Walker Digital, a Stamford, Connecticut, R&D lab founded in 1994 by entrepreneur Jay Walker, spawned the web-based travel business Priceline.com and continues to manage an extensive intellectual-property portfolio. Pasadena, California–based Idealab, founded by its CEO, Bill Gross, in 1996, has Answers.com, Citysearch, eToys and other brands under its belt and currently focuses on clean technology.
By contrast, of four then-new-wave incubators that participated with Lerner in a Harvard symposium in 2000 — Cambridge Incubator, Divine InterVentures, Intend Change and Lycos Labs — only the first survives, as Cambridge Innovation Center. In a building hard by the Massachusetts Institute of Technology campus, CIC houses 250 companies, and those it has supported have raised $865 million in venture capital since 2001. Another established facility, the ten-year-old Colorado Springs Technology Incubator, says its clients in 2010 had $7 million in sales and were hiring despite the slow economy.
CSTI benefits from federal government connections; it administers the annual National Security Innovation Competition, held at the U.S. Air Force Academy last month. But that program and CSTI as a whole also have private sector and university sponsors and participants and close ties with the local Chamber of Commerce, which puts a check on the kind of meddling that Harvard’s Lerner warns about.
Representing a newer wave of government-supported incubation is the New York City Economic Development Corp., which has organized or promoted dozens of development centers in such fields as bioscience, media and emerging technologies. Its influence, along with that of other city and private sector entities, was evident in the December unveiling of the FinTech Innovation Lab by ten major financial institutions and consulting firm Accenture. The development organization offered $25,000 and work space to promising financial technology entrepreneurs, who are now working toward an “investor day” presentation in July.
Across the pond, London’s New Entrepreneurs Foundation, with backing from the likes of Deloitte, Diageo, McKinsey & Co. and 3i Group, wants to boost innovation by enabling 25 people to spend a year training and networking with U.K. industry leaders. And, on its own, interdealer brokerage ICAP in March announced a financial technology incubation fund, Euclid Opportunities. Mark Beeston, the ICAP executive overseeing the project, says initial reaction from capital seekers and suppliers alike has far exceeded expectations. The appetite for cutting-edge investment seems to be healthier than he or most anyone else had imagined. • •
Jeffrey Kutler is editor-in-chief of Risk Professional magazine, published by the Global Association of Risk Professionals.
