The Innovator's Solution: Creating and Sustaining Successful Growth (Creating and Sustainability Successful Growth)

by Clayton

Professor William Sahlman of the Harvard Business School has studied the phenomenon of venture capital “bubble” investing for two decades. He observes that when many venture investors conclude that they need to have strong investment positions in a “category,” investors develop “capital market myopia”—a view that does not consider the impact that other firms’ investments will have on the probability that their individual investment will succeed. When massive amounts of available venture capital are focused on an industry where investors perceive steep scale economies and strong network effects, the funds and the companies in which they invest are compelled to engage in “racing” behavior. Firms seek to dramatically outspend the competition, because it is a company’s relative spending rate and its relative execution capability that drive success. Sahlman notes that once a race like this has started, venture funds have no option but to engage in that behavior if they want to participate in that investment category.