VENTURE CAPITAL INVESTMENT BUBBLES: LESSONS FROM THE PC INDUSTRY
Guy-Frederic N. Courtin, Babson College
Raju J. Shah, Babson College
Principal Topic
The period 1996 through 2000 was a golden era for classic venture capitalists and the entrepreneurial companies they invested in. Overall returns soared, and by the end of the 1990s, Internet-related investments were driving the classic venture capital industry in the USA. But as demand for shares in IPOs escalated, the quality of most companies floating those shares deteriorated. Rather suddenly, investors became disillusioned. Stock prices tumbled, the IPO window for Internet-related companies slammed shut, venture capital returns nose-dived, and venture capital investments in early-stage information technology companies almost dried up. Some observers are now fretting that the collapse of the Internet bubble will have dire consequences not only for the venture capital industry, but more importantly for the US economy as a whole. They argue that the rate of innovation will slow and the US information technology industry will lose its competitive advantage in the world marketplace. Our paper examines the long-term consequences of another venture capital gold rush—investments in personal computer companies—and draws parallels to the recent Internet bubble.
Method
First, we identified and tracked 70 PC manufacturers that received venture funding between 1977 and 1987. We determined the amount of capital invested and market capitalization using data sources including industry reports, the Venture Economics database, and the NASDAQ database. The data were then aggregated to determine overall industry returns during the time frame of the PC bubble. Second, using market share data, we studied the overall competitiveness of US PC manufacturers. Finally, we examined the relationship between the rise in the PC industry and the creation of new industries.
Results and Implications
Our analysis indicates that while many of the original PC manufacturers have disappeared, overall returns have been positive. In addition, the examination of market share data demonstrates that American PC manufacturers continue to dominate the PC industry. Moreover, new industries have grown out the PC bubble, including Internet-related industries. Our results parallel those of Bygrave, Lange, Wu, and Roedel with respect to the hard drive industry, which showed that US hard drive companies maintained their domination of the global market long after the peak of the venture capital investment bubble in that industry, and that the rate of innovation increased. We believe that our research suggests that the pundits’ dire predictions concerning the consequences of the collapse of the Internet bubble are greatly exaggerated.
CONTACT: Guy-Frederic N. Courtin, Babson College, Babson Park, MA 02457; gcourtin@babson.edu
© 2004 Babson College. All rights reserved. Last updated May 2004.