Investor Exits, Innovation, and Entrepreneurial Firm Growth
Questions for Research
Summary of a Workshop
Stephen A. Merrill, Rapporteur
THE NATIONAL ACADEMIES PRESS
THE NATIONAL ACADEMIES PRESS;
500 Fifth Street, N.W. Washington, DC 20001
NOTICE: The project that is the subject of this report was approved by the Governing Board of the National Research Council, whose members are drawn from the councils of the National Academy of Sciences, the National Academy of Engineering, and the Institute of Medicine. The members of the committee responsible for the report were chosen for their special competences and with regard for appropriate balance.
This study was supported by Grant No. 20070350 between the National Academy of Sciences and the Ewing Marion Kauffman Foundation. Any opinions, findings, conclusions, or recommendations expressed in this publication are those of the author(s) and do not necessarily reflect the views of the organizations or agencies that provided support for the project.
This work/research was funded by the Ewing Marion Kauffman Foundation. The contents of this publication are solely the responsibility of the grantee.
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THE NATIONAL ACADEMIES
Advisers to the Nation on Science, Engineering, and Medicine
The National Academy of Sciences is a private, nonprofit, self-perpetuating society of distinguished scholars engaged in scientific and engineering research, dedicated to the furtherance of science and technology and to their use for the general welfare. Upon the authority of the charter granted to it by the Congress in 1863, the Academy has a mandate that requires it to advise the federal government on scientific and technical matters. Dr. Ralph J. Cicerone is president of the National Academy of Sciences.
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The Institute of Medicine was established in 1970 by the National Academy of Sciences to secure the services of eminent members of appropriate professions in the examination of policy matters pertaining to the health of the public. The Institute acts under the responsibility given to the National Academy of Sciences by its congressional charter to be an adviser to the federal government and, upon its own initiative, to identify issues of medical care, research, and education. Dr. Harvey V. Fineberg is president of the Institute of Medicine.
The National Research Council was organized by the National Academy of Sciences in 1916 to associate the broad community of science and technology with the Academy’s purposes of furthering knowledge and advising the federal government. Functioning in accordance with general policies determined by the Academy, the Council has become the principal operating agency of both the National Academy of Sciences and the National Academy of Engineering in providing services to the government, the public, and the scientific and engineering communities. The Council is administered jointly by both Academies and the Institute of Medicine. Dr. Ralph J. Cicerone and Dr. Charles M. Vest are chair and vice chair, respectively, of the National Research Council.
PLANNING COMMITTEE ON INVESTOR EXIT STRATEGIES AND ENTREPRENEURIAL FIRM GROWTH
Timothy F. Bresnahan, Chair Landau Professor in Technology and Economy
Lewis Coleman President
Josh Lerner Jacob Schiff Professor of Investment Banking
Harvard Business School Harvard University
Edward E. Penhoet Director
William R. Raduchel Independent Director and Investor
J. Leighton Read General Parnter
Susan E. Woodward Principal
Sand Hill Econometrics, Inc.
Stephen A. Merrill Study Director
Mahendra Shunmoogam1 Program Associate
Daniel Mullins2 Program Associate
Cynthia Getner Financial Officer
BOARD ON SCIENCE, TECHNOLOGY, AND ECONOMIC POLICY
For the National Research Council (NRC), this project was overseen by the Board on Science, Technology, and Economic Policy (STEP), a standing board of the National Research Council established by The National Academies of Sciences and Engineering and the Institute of Medicine in 1991. The mandate of the STEP Board is to integrate understanding of scientific, technological, and economic elements in the formulation of national policies to promote the economic well-being of the United States. STEP bridges the disciplines of business management, engineering, economics, and the social sciences to bring diverse expertise to bear on important public policy questions. The members of the STEP Board and the NRC staff are listed below.
Edward E. Penhoet
Director, Alta Partners
Lewis W. Coleman
Ralph E. Gomory
Research Professor, Stern School of Business
New York University
Mary L. Good
Donaghey Professor and Dean
Donaghey College of Engineering & Information Technology
University of Arkansas at Little Rock
Amory Houghton, Jr.
Former Member of Congress
William F. Meehan III
Lecturer in Strategic Management
Stanford Graduate School of Business
David T. Morgenthaler
Joseph P. Newhouse
John D. MacArthur Professor of Health Policy and Management
Director, Division of Health Policy Research and Education
U.S. Venture Partners
William J. Raduchel
Independent Director and Investor
Jack W. Schuler
Crabtree Partners, LLC
Alan Wm. Wolff
Dewey & LeBoeuf LLP
Ralph J. Cicerone
National Academy of Sciences
Charles M. Vest
National Academy of Engineering
Harvey V. Fineberg
Institute of Medicine
Stephen A. Merrill
Charles W. Wessner
Sujai J. Shivakumar
Senior Program Officer
David E. Dierksheide
Cynthia A. Getner
Preface and Acknowledgments
In 2007 the National Academies’ Board on Science, Technology, and Economic Policy (STEP) received funding from the Ewing Marion Kauffman Foundation to hold a workshop to examine the marked change in exit strategies of venture-backed U.S. firms coinciding with the dot-com crash of 2001. In that year there was an abrupt and lasting shift away from taking firms public through initial public offerings (IPOs) and toward mergers with established firms. There had been much discussion of the causes, consequences, and policy implications of the change in exit strategies but little systematic inquiry. The purpose of the workshop was not to answer those questions but to explore the merits, feasibility, and possible directions of research on these topics, in short, to provide guidance to researchers and research sponsors.
A planning committee was appointed composed of Timothy Bresnahan, chair, Stanford University economics department; Lewis Coleman, DreamWorks Animation; Joshua Lerner, Harvard Business School; William Raduchel, independent investor and director; Edward Penhoet, currently with Alta Partners and formerly of the Gordon and Betty Moore Foundation; Leighton Read, Alloy Ventures; and Susan Woodward, SandHill Econometrics. Approximately 30 entrepreneurs, investors, and academic experts in corporate finance, law, and venture economics attended the meeting in Washington. An effort was made to select participants with methodologically and theoretically diverse backgrounds. Future discussion of the issues examined would benefit from additional perspectives, including historians of markets and entrepreneurship, technology specialists, and students of social networks.
This document is a summary report of the discussions that took place at the workshop. The committee’s role was limited to planning the meeting. As study director I prepared this summary. The views expressed in the summary are those of the speakers and discussants and are not the consensus views of participants, the planning committee, the Board on Science, Technology, and Economic Policy, or the National Academies. This report has been reviewed in draft form by individuals chosen for their diverse perspectives and technical expertise, in accordance with procedures approved by the National Academies’ Report Review Committee. The
purpose of this independent review is to provide candid and critical comments that will assist the institution in making its published report as sound as possible and to ensure that the report meets institutional standards for quality and objectivity. The review comments and draft manuscript remain confidential to protect the integrity of the process.
We wish to thank the following individuals for their review of this report: Philip Auerswald, George Mason University; Amy Dittmar, University of Michigan; Melissa Graebner, University of Texas, Austin; Mark Heesen, National Venture Capital Association; William Janeway, Warburg Pincus, LLC; and Martin Kenney, University of California.
Although the reviewers listed above have provided many constructive comments and suggestions, they were not asked to endorse the content of the report, nor did they see the final draft before its release. Responsibility for the final content of this report rests entirely with the author and the institution.
Finally, the National Academies and the STEP Board thank Dr. Robert Litan, Vice President for Research and Policy of the Kauffman Foundation, for making the workshop possible and for contributing significantly to the discussion.
Stephen A. Merrill, Study Director