Wednesday, October 18, 2006

Group #5 - Zook Part 2

Chapter 7

Zook describes the foundations for the Dot-Com boom as relying heavily upon a venture capitalist social network. He prefaces the chapter by explaining that even in failed business ventures there is experiential value; “Even if a new firm does not succeed, valuable information, experience and contacts develop during the process.”

The history of venture capitalist culture in the San Francisco Bay Area starts with the founding of the Arthur Rock and Thomas partnership in 1961. The pair’s first investment was in a company called Scientific Data Systems; they acquired the needed capital from social networks formed in past ventures, including Teledyne and Fairchild. The possibility of matching Rock and Thomas’ earnings (up to 20% of company profits) attracted more venture capitalists to the scene.

While the 70s and 80s are characterized by a slump in capital investment, Zook said the decades also see the emergence of venture “angels” (investors with lots to spend) and seed venture firms. The 1990s see a resurgence of capital investment culture, and social networking becomes the primary tool for attracting investors to blossoming business ideas.

The birth of the Netscape project in 1993 begins to bring more developers to the region. Attracting investors was still difficult. But in 1995, when Netscape went public at $28 a share, the demand was so high that the price doubled by the end of the trading day, proving that the Internet was a “viable commercial space.” (p. 107) This excited activity and investment in other Internet based companies, specifically eBay, which also became a huge commercial success.

Though securing funds was still a time consuming task for upstart businesses, the money began to pour in, laying the foundation for an ultimately unsustainable “hypercharged” venture capital bubble.

Chapter 8

In this chapter, Zook focuses on the influx of finances from venture capitalists that served as the breeding ground for a variety of dot-coms coming into fruitation despite subpar business plans and limited research. Ignoring their previous role as the "technological
gatekeepers," venture capitalists "descended into a rout of chasing companies to invest" (122).

Although it is tempting to use a hindsight bias to ignore this fact, venture capitalists were put into a tough spot as the overwhelming belief of many in the industry at the time was that the Internet would change everything, and it was "touted as a way to completely revamp business models" (116) -- the "dot-com model." Entreprenuers went about gaining market share as quickly as they could without much thought given to profitability, but when the pressure came to go public as an IPO, the game shifted. As a result, many dot-coms folded and unemployment rates skyrocketed by mid-2001, particularly in the Silicon Valley area.

Chapter 9

Zook ends his sermon with an examination of the positive aspects of the dot com boom subsequent bust. He argues that while much human and financial capital was invested in poorly concieved products, business practices, and massive overheads, the enthusiasm for the internet and investment in innovation eventually allowed companies like Ebay, Yahoo, and Google to learn from mistakes and garner market share. "Overinvestment an inherent part of the innovation process (152)."

While Zook admits there was much wasteful spending, he holds the lessons learned from the Bust to be crucial to the future of IT investment. And buy low-sell high is an inherent part of the capitalist process. With the bust, the price of labor, technology and knowledge went down, providing a mass of cheap resources for new companies to start up – is one such example. The company took a more modest approach to investment, and focused on providing a simple yet valuable service to customers instead of promising the world. Despite the crash, a strong entrepreneurial climate prevailed.

Discussion Questions:

Zook makes a convincing case for the proximity of venture capital and human resources as a driving force in the acceleration of the internet, but his case implies a lot more than he states explicitly. For instance, if you needed to know someone to get "in" with a "VC," these networks were necessarily geographically insular, but what are the moral implications that Zook fails to mention about this model? Money breeds more money, and for the same types of people who had it in the first place. How does this mesh with the utopian internet that Dyson and others envisioned? Is there any way around this model, or is it simply, as Zook suggests, a fact of capitalism?

Pretend you're a "futurologist": With resources so concentrated in certain metropolitan areas, what will happen to mid-sized cities like Madison, or to sububs, or rural areas, or to the burgeoning cities in less-wired places like Brazil and Kenya? Will they always be hopelessly lagging behind? If so, does it matter? If not, how will they pull themselves ahead?


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