by Paul A. Gompers and Josh Lerner
(Harvard Business School Press )

Did venture capital cause the explosion in innovation in the last thirty years, or did innovation jump-start venture capital investing? This is just one of many questions about the power of venture capital that HBS professors Paul Gompers and Josh Lerner ask in The Money of Invention: How Venture Capital Creates New Wealth.

The authors answer the chicken-or-egg question, showing that venture capital has indeed been a force in innovation — so much so, in fact, that by 1999 it accounted for 18 percent of innovative activity in the United States. That trend will continue, they contend. Despite many of the recent excesses in the venture industry and the slide in the economy — and more specifically in the venture-drenched tech sector — Gompers and Lerner assert that venture capital investing will remain a critical force in bringing new ideas and innovations to the marketplace. At the same time, the industry is likely to undergo fundamental changes in the years to come.

Gompers and Lerner explain in detail how the venture capital industry works, including its boom-and-bust cycles. The authors put the feverish venture capital activity of the last few years in the context of the broader history of the industry. While they suggest the events in recent years had many similarities with earlier cycles, they highlight some fundamental discontinuities occurring in the industry, including the changing mix of investors and the growing role of intermediaries. Gompers and Lerner argue that the next decade is likely to see a fundamental transformation in the structure of the venture industry, as a relative handful of large, professionally managed venture capital groups becomes increasingly dominant.

The Money of Invention is geared toward three key audiences. Entrepreneurs can use the book as a guide through the intricacies of seeking a capital investor and to understand that entrepreneurial success depends on many factors — money is just the beginning. For independent venture capital managers, the book gives advice about the strategic responses that are likely to be most effective in the changing venture capital environment. The third group — governments, nonprofits, academic institutions, and large corporations — can learn how to emulate the rigors of a venture capital firm to finance innovative ideas in their own organizations.

— Margie Kelley

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