Risk and Reward For the Common Weal

Venture capitalist Venky Harinarayan makes the point that the complex financial instruments that contributed to our current economic distress were truly bad for business.

In the good old days (the 1990s), Wall Street took a lot of risk on fledgling companies with good ideas--like Amazon.com and eBay. The odds that they would succeed were very small, but investing in them was the only way to make a real killing on Wall Street.

Then two things happened to dampen investors' appetite for start-ups. One was the bursting the tech bubble, which caused investors to say, "gee, not every investment is a sure thing."

The other change was that banks started creating financial instruments like CDOs (collatoralized debt obligations) that offered substantial returns for seemingly less risk than, say, your typical tech start-up. The result?

Since 2002, there have been just 351 IPOs out of 19,300 VC-backed companies--fewer than one in 50... Just two years in the late 1990s, namely 1996 and 1997, saw more IPOs than the last eight years (2001 to 2008) combined. The ratio of mergers and acquisitions to IPOs has gone from roughly 1:1 from 1996 to 2000 to 6:1 during 2001 through 2008.

Maybe now that investors have been burned more severely by the lure of easy money, they'll look for investments that actually create value instead of shuffling it around.

And that turn of events will help new companies emerge, create jobs, and contribute taxes to our common weal.