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The New Old Thing

With less private money in the market and with the dot-com halo gone, investors will be more patient and innovation will go back to what it always has been: a plodding, collaborative process punctuated by periods of spectacular growth.

Since March of last year, the Nasdaq has plunged more than 60%, a record number of bankruptcy filings have been recorded, mergers and aquisitions are on the uptick and the economy is in recession. As a result, the pace of innovation has slowed dramatically and funding for new innovation has dried up. So much for the innovation engine inside the U.S. economy.

Well, maybe. But maybe not.

The pace of innovation has always been slowed by the market's demand that products had to work before they were commercialized. After all, who would buy something that did not work, or invest in companies making such a thing?

Always, that is, until the dot-com boom. Buyers of technology products and services became, in essence, early adopters. They bought products and services that didn't always work well and they helped the company fix them by using them. The stock market was booming; at least some of these new-fangled products and services could be commercialized and was commercialized. So who was going to argue the point?

The dot-com model allowed good and bad things to happen. On the good side, many new companies and technologies were created, and many new markets were opened worldwide. The Internet became a global business tool, a revolutionary social and cultural medium that allows ideas to flow freely and instantaneously. The result is the Networked Economy.

On the bad side, an illusion of "technology on demand" was created. In the resulting over-funded and over-heated market--with companies launching left and right, initial public offerings booming, and share prices inflated--the pace of innovation appeared to increase. The injection of private capital, often in the later funding rounds of startups, helped speed services to market while hyping the "technology." This combination of factors fueled the dot-com frenzy, and investors bought into all kinds of companies.

In some cases, new technology was created. But often, investors bought the illusion of new technology when what really was being created was a service. These services and related applications were developed for everything from grocery delivery to tee time reservations at golf courses to online pet-food ordering. Many dot-coms marketed themselves as "technology companies" to cash in on the investor frenzy, but in reality, many were just old-fashioned service companies, with no technology focus and little technology expertise, dressed up in new high-tech gear.

Ultimately, with little market analysis, the public need for a lot of these services was simply overestimated. In the wake of many resulting high-tech bankruptcies, a lot of private sector funding for innovation dried up.

Now, with less private money in the market and with the dot-com halo gone, investors will be more patient and innovation will go back to what it always has been: a plodding, collaborative process punctuated by periods of spectacular growth. A 1997 report by the Center for Science and International Affairs at Harvard's Kennedy School of Government noted that, "American science and technology thrives because it is supported by a pluralistic system. There are many sources of support, many types of performers, and a maze of linkages amongst funders, performers, and users of science and technology."

Edison joked that he had only one great idea. Amid the current economic downturn, entrepreneurs are creating all kinds of new technologies, all over the United States. Moreover, we are now in an era that will once again require all the ingenuity and technical know-how that can be mustered. Innovation will find support--be it private or public--because the situation demands it.

The present economic and political picture will also bring a renewed focus to the federal government's role as a funder and purchaser of technology products and services, regardless of industrial policy. The effort to combat terrorism will require an array of information and biometric technology products that will have to be created or adapted. Government agencies involved in defense, transportation, health, and homeland security to name a few, all will require help from the private sector to create new technology products, methods, and systems to combat terrorism. In the long run, this will help support a technology sector recovery. The dot-com era was a great ride, but now it is back to basics: research and development. A renewed focus on creation will help jump-start a global idea flow. When venture capital funding does return to previous levels, commercialization will again ignite. The history of technology in the United States is replete with risk-taking entrepreneurs, creative scientists and engineers, brilliant academics, pioneering capitalists, and sometimes one person with a great idea. That (and a little money) are still all it takes.

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