Making a Mint Overnight
By Alexander L. Taylor III.
COVER STORY
"I can smell the Ferrari now," chants a fresh crop of instant multimillionaires
Of all the possible values of human society, one and one only is the truly sovereign, truly universal, truly sound, truly and completely acceptable goal of man in America. That goal is money, and let there be no sour grapes about it from the losers.
--C. Wright Mills, The Power Elite
There are many ways to attain great wealth. It can be done legally or illegally, through personal effort or inheritance or marriage. Luck can play a role; so can skill, brains, ambition and opportunity. But big money, the kind of money that buys expansive estates and ocean-going yachts, California vineyards and professional sports teams, is usually reserved for a select few.
A new crop of exceptionally rich people is springing up in America, almost from nowhere. Rarely have so many made so much so quickly. They have a gambler's nerve, a fortuneteller's foresight and a prospector's nose for gold. They have prospered first by starting or investing in small, unknown companies, and then capitalizing on the 17-month-old bull market that has sent the Dow Jones industrial average to one new high after another.
The key to the wealth of the new market multimillionaires is the public's seemingly insatiable appetite for shares in companies selling their stock for the first time. Preceded by a blizzard of legal papers, corporate puffery and prospectuses, new companies are rushing to capitalize on the buoyant market. Last year nearly 900 companies made initial offerings of stock, raising $12.8 bilion. That is almost nine times more capital than was raised by new firms in 1982 and even more than the amount for all the years since 1971 put together. Mutual funds and pension funds, big institutional buyers and individual shareholders have all anxiously sought to invest in the new firms.
Of course, not all the plungers have emerged winners. Some entrepreneurs saw the sunny prospects of their companies turn stormy in a matter of weeks, and their paper profits vanished as quickly. Other investors got caught in a temporary market downdraft during the second half of 1983. Irrational enthusiasm pushed up the price of some high-technology stocks to 80 or more times their annual earnings, compared with about 16 times earnings for proven blue-chip growth companies like IBM. When reality caught up with greed, a number of fast-rising new issues fell to earth, and the profits of many backers fell with them.
The shakeout required many companies to re-evaluate their plans. Some firms scaled down their public offerings or postponed them. But the march to market continues. Although December is usually a poor time to catch Wall Street's attention, 105 companies sold stock for the first time last month, and the fast pace is expected to continue this year. Among the firms making initial offerings last week were DNA Plant Technology, a New Jersey agricultural genetics firm; Sporto, a Boston manufacturer of women's foot wear; and Thor Industries, an Ohio maker of motor homes and trailers. Some of the largest firms going public are savings and loan associations, which are trying to raise capital after several years of disastrous losses. But the most intriguing companies for Wall Street are ones that have names beginning with "bio" or ending in "tronies." Those are the syllabic codes for firms tapping burgeoning technologies in medicine and microelectronics.
One of the most successful players in the new-issue market is Arthur Rock, 57. During the past quarter of a century, he has compiled an extraordinary record of picking new companies and helping them grow into profitable giants (see box). In addition, he has become the cornerstone of the Silicon Valley investment community, where many of America's new industries are now taking shape. By investing money in dozens of companies, Rock has built a personal fortune of at least $200 million.
During the past year, a number of company founders have claimed paper profits in the tens of millions of dollars. Several have registered gains of $100 million or more, making them, overnight, some of the richest people in the U.S. The winners in the going public game include a Korean immigrant, a former disc jockey, a onetime airplane mechanic, a theater critic-turned-stock analyst, a college dropout, an engineer-turned-stock analyst-turned-financier, and a molecular biologist.
Most of the new multimillionaires come from middle-or lower-middle-class families, and few showed much early promise. Several had indifferent school records and drifted until some spark propelled them toward supersuccess. Yet all were independent enough to start or finance a new venture and canny enough to find fields ripe for development. Some profited from high technology and built companies that produce computers, video terminals or computer software. Others found fortunes in more traditional fields such as manufacturing and medicine. Still others turned to Wall Street not to raise money but to capitalize on new ways of analyzing stocks and sending stock information. Among the biggest winners in the new-issues market:
Allen E. Paulson, 61, founder of Gulfstream Aerospace, the maker of plush corporate jets. As an Iowa farm boy growing up in the Depression, Paulson supported himself by selling newspapers and cleaning hotel bathrooms. Following high school, he went to work for TWA as a mechanic and moonlighted at an auto-repair garage. After selling surplus airplane parts and advising competing airlines and then TWA on engine design, Paulson in 1951 set up his own business converting surplus passenger planes into cargo aircraft. It grew, and by 1978 he was ready to begin building airplanes on his own. He acquired Grumman's money-losing corporate-aircraft division in Savannah, Ga., renamed it Gulfstream, improved quality, cut costs and accelerated delivery times. When Gulfstream went public in April, Paulson collected $85 million in cash and stock worth $551 million.
Low-key and brimming with aw-shucks charm, Paulson had been moderately wealthy for several years before his half-billion-dollar windfall. Now he complains that "going public was probably the worst thing that happened to me. My private life became my public life. It's like living in a fishbowl." Paulson is building a 10,000-sq.-ft. replica of an antebellum mansion near Savannah that has 2,000 sq. ft. of porches, two man-made lakes, a nine-hole golf course, a tennis court, a boat dock and a landing pad for his five-passenger Bell JetRanger III helicopter. He uses the helicopter to make short hops for business trips and to visit his Hilton Head, S.C., retreat. Paulson also has four other residences around the U.S.
K. Philip Hwang, 47, founder of TeleVideo Systems, a maker of computers and computer terminals. At twelve, Hwang was smuggled from North Korea to South Korea by U.S. troops under some maps and canvas in an Army truck. After arriving in the U.S., he paid his way through college working as a dishwasher and waiter in Lake Tahoe casinos. Hwang gained business experience by running a 7-Eleven store in San Jose, Calif., and then in 1975 used his savings of $9,000 to start making video games in his Cupertino, Calif., garage.
Though his company was shunned at first by established financial backers, Hwang got started making low-cost, high-quality computer monitors. When TeleVideo went public in March, Hwang sold shares worth $11.8 million, but kept stock worth $520.4 million.
The only discernible change in Hwang's life-style has been to move into a new home in Los Altos that was modeled after a Welsh castle. It has a sauna and Jacuzzi in the master bedroom and an elaborate security system. Hwang still works a six-day week. Says he: "My executives call me a slave driver. But I tell them to look at Osborne, and they don't say anything." Adam Osborne headed a fast-growing personal-computer firm that announced plans to go public last winter but ended up filing for bankruptcy in September.
Benjamin Rosen, 50, a major investor in Lotus Development and chairman of Compaq Computer. Sophisticated and possessing a soft-spoken wit, Rosen earned electrical-engineering degrees from the California Institute of Technology and Stanford and worked first for Raytheon as an engineer. While still in his 20s, he decided to become a stock analyst. He picked up an M.B.A. degree, worked for Coleman & Co., a New York securities firm, and then for Morgan Stanley & Co. and began publishing a highly regarded electronics-industry newsletter.
Three years ago, Rosen launched his third and most successful career as a nurturer of young companies. He started two venture-capital funds with L.J. Sevin, founder of Mostek, a semiconductor manufacturer. Sevin Rosen Management's $2.1 million investment in Lotus, a software manufacturer located in Cambridge, Mass., turned into a holding worth $70 million when the company went public in October. The fund invested some $2.5 million in Compaq, a Houston-based firm that makes a portable computer that runs like the IBM PC. When Compaq went public last month, that investment was suddenly worth $40 million. But not all Sevin Rosen picks are winners. The fund is likely to lose the $400,000 it invested in Osborne Computer.
Rosen is much more than a passive investor. Last March he became chairman of Compaq, and he now spends one day a week on its affairs. His main interest is marketing, for which he has an instinctive knack. Like most successful venture capitalists, Rosen sees far more deals than he can participate in. Working out of an office in New York City's Pan Am Building, he screens proposals "ruthlessly" and invests in only about one out of every 50 that are presented to him. Looking back over his three careers, Rosen says, "It was fun being an analyst and fun being an engineer, but this is the most fun of all." It should be. Rosen's net worth is now estimated at $20 million.
Arnold Bernhard, 82, creator of the Value Line stock-rating service. The son of an Austrian coffee merchant and his Rumanian wife, Bernhard grew up in Brooklyn. A Phi Beta Kappa, he earned a degree in English from Williams College, then got a job writing theater reviews for TIME in 1925. His pay: $10 a week. Hoping to make more money, Bernhard left after a few months and eventually wandered to Wall Street. There he earned $6,000 a year before losing his job during the Depression. He recalls, "I had a couple of weeks there when I was trying to decide whether to jump off a bridge."
Soon Bernhard had a foothold again, managing money for some clients and working on a stock-rating system, which in 1935 he turned into the Value Line Investment Survey. Today 111,400 subscribers pay Value Line $365 a year for an assessment of 1,700 companies.
Autocratic yet affable, Bernhard lives in the Georgian colonial home in suburban Westport, Conn., that he bought for $55,000 in 1944. He uses a second-floor room as an office, often working a ten-hour day. His stock in Value Line was worth $145 million when the company went public last year.
Neil Hirsch, 36, founder of Telerate Systems, an electronic financial information service. "I was an average kid; I was an average student," Hirsch recalls. "But when I was 21, I realized I had always wanted to make something of myself. I doubted I could be a terrific lawyer or a doctor, but I realized I could make a lot of money." Hirsch's father ran the New York buying office of a family-owned department-store chain. The younger Hirsch spent two years studying business at the University of Bridgeport but then dropped out. While living in a fourth-floor walk-up on Manhattan's Lower West Side, he attended more business classes at Pace University and started hanging out around stock-brokerage offices. It was there that he had the idea for speedily transmitting financial data to individual customers.
In 1969 Hirsch formed Telerate to track the prices of volatile commercial paper, corporate IOUs that are issued by such companies as General Motors, Sears and Household Finance, and send them electronically to customers' video terminals. Some 11,000 subscribers in the U.S. and overseas pay an average of $700 per month for the service. In April, when Telerate went public, Hirsch held shares worth $67.5 million.
Last summer Hirsch moved into a $900,000 apartment on Manhattan's East Side. He now commutes to his 104th-floor office at the World Trade Center in a Mercedes limousine.
Mitchell Kapor, 33, founder of Lotus Development, a computer software company. A Brooklyn-born math whiz, Kapor graduated from Yale at 20, then dabbled as a disc jockey, an instructor in Transcendental Meditation and a mental-hospital counselor. Little commanded his attention until he impulsively traded in his stereo system for an Apple II computer. Within a few months, he wrote two computer programs that create charts and graphs for businesses and sold them to a software distributor for $1.2 million. With royalties from the programs and backing from venture capitalists, he founded Lotus Development in 1982.
Within a year the company's 1-2-3 program, which combines popular business functions like spread-sheet analysis and graphics into one package, became the industry's bestseller at a price of $495. Sales through September: 110,000. Lotus is now the second largest independent software company in the U.S. and has estimated annual sales of $40 million. Kapor held some $70 million worth of stock when Lotus went public in October.
Kapor still attends business meetings in blue oxford-cloth shirts, rumpled khakis and running shoes. He operates out of a cramped 12-ft. by 15-ft. office in the company's headquarters, a four-story former glue factory. Says he: "I believe the trick is to be ambitious but not driven."
Walter Gilbert, 51, co-founder of Biogen, a genetic-engineering firm. Gilbert, who studied chemistry and physics at Harvard and received a Ph.D. in mathematics at Cambridge, has spent most of his life working with genes. While a professor of molecular biology at Harvard, he won the Nobel Prize in 1980 for his work in exploring the DNA molecule. By then, Gilbert and eight other scientists had decided, at the urging of financiers, to capitalize on their knowledge. With $750,000 in venture capital, they incorporated Biogen in Curasao in The Netherlands Antilles. The company's goal is to discover, produce and sell practical applications of gene-splicing technology.
Biogen has never made an annual profit, and lost $5.7 million during the first nine months of last year. But it is considered one of the hottest companies in a field that is likely to be a great growth area in the next decade. The firm produces interferon, a substance that is being tested against a variety of illnesses, ranging from cancer and herpes to the common cold. Gilbert and his wife hold shares that were worth $12 million at the public offering in March, and he draws a salary of $274,200 as chairman of Biogen.
Very little has changed for Gilbert. The scientist and his wife still reside near Harvard. Says he: "We live in a very simple fashion. I come from a typically academic background, where you have an adequate income and are not really in it for the money."
The enormous fortunes of big stock market winners would appear to dwarf the wealth made by businessmen in earlier eras. In 1848 John Jacob Astor, the fur trader and real estate owner, was the richest man in the U.S. with $20 million. At his death in 1877, Railroad Pioneer Cornelius Vanderbilt left $100 million. John D. Rockefeller was said to be worth nearly $1 billion when he died in 1937. After adjustments for inflation, however, the older fortunes remain impressive. Moreover, fortunes made before 1913 were not subject to the federal income tax. Astor's $20 million would probably be worth $233 million today. Vanderbilt's $100 million is the equivalent of $947 million, and Rockefeller's $1 billion would be the same as nearly $7 billion.
There have never been so many millionaires walking about as there are today. While only 13,000 people could claim a net worth of $1 million in 1948, as many as 500,000, a number nearly equal to the population of Milwaukee, qualified in 1981. Even an annual income of $1 million is no longer enough to set one apart from the masses. In 1920 just 23 people reported making $1 million or more. In 1981, the latest year for which figures are available, 5,286 people, including an assortment of baseball players and rock stars, filed tax returns showing incomes of more than $1 million.
Since World War II, there has been no surer way of making big money legally than founding a company and taking it public. Instead of waiting years for a firm to repay investments in the form of profits, an entrepreneur can sell future earnings to outsiders in the form of shares. In a rising stock market, investors are willing to pay a premium for the anticipated returns from young, fast-growing companies. That is why firms like Diasonics, which makes medical diagnostic equipment, can go public at a per-share price equivalent to 70 or more times its current income at the same time that General Motors stock is selling for only about six times its net profits per share.
As Financial Journalist George J.W. Goodman, who writes under the nom de plume Adam Smith, observed in The Money Game, a 1968 analysis of the stock market: "Really big money is not made in the stock market by outside investors. I am talking about multiples of millions rather than just, say, one lousy million. Who makes the really big money? The inside stockholders of a company do, when the market capitalizes the earnings of that company ... I am not making any value judgments. This is the way things are."
For the head of a company that is going public, an initial stock offering is like a 21st birthday, the arrival of an heir or a bar mitzvah. It is a period of intense activity and emotional strain that transforms a firm from a little-known private business into one that must operate under the merciless scrutiny of lawyers, analysts, competitors and investors. Sometimes the pressure is so great that the smooth running of the firm suffers. Says California Venture Capitalist Thomas Davis: "Baseball players have to perform when people boo and shout. Companies have got to learn to live with the conditions of life."
The process begins when a young firm has outgrown the money it originally raised to launch the company. The corporation may need the funds to finance research, expand facilities or launch new marketing campaigns. In addition, the founders and early investors often want to get cash in return for some of their holdings. If the firm has good potential or a good product, it has usually already attracted the attention of investment bankers, who aggressively seek out prospects to earn the profits that come from underwriting the initial public offering. Says Chairman Thomas Unterberg of New York City's L.F. Rothschild, Unterberg, Towbin, a leader in new issues: "Getting there first is very important. The firm that gets the deal is usually the one that got there first and then spent the most time."
Since most of the big investment banking firms are based in New York, while many of the promising new companies are in Northern California's Silicon Valley, minidramas of the new-issues scene are often played out on the long nights from New York to San Francisco. Well-appointed investment bankers heading out to call on clients stretch out in first class. Farther back in the cabin, rumpled entrepreneurs, tired from a day trying to raise money, punch away at their calculators. Occasionally the coach passengers glimpse a bright future ahead. Well before Zitel, a small computer-memory company, went public last month, President Robert Welch was overheard confiding to a colleague on a flight, "I can smell the Ferrari now."
Once a decision is made to go public, the company founders sit down with investment bankers to decide how much money they want to raise and how much of the corporation they want to sell to the public. The calculations are based on experience and intangibles: the expected future value of the company and its products and the market performance of similar companies.
Then comes the crucial job of figuring out the price to put on the stock. To give the new company a blue-chip image, investment bankers initially try to keep the range between $10 and $25 per share. If the price is set too high, the stock will be shunned. If it is fixed too low, the shares will be sold out immediately, but the company and its backers will raise less money.
The next stage is to draw up a preliminary prospectus, a comprehensive definition of a company, which will be shown to investors and the Securities and Exchange Commission. Often running to 40 or more pages of closely spaced lines, the prospectus is drafted by battalions of underwriters, accountants and lawyers who battle over clarity and nuance, spending hours quibbling over key phrases. By law, the prospectus must disclose information about competition and potential risk. It must also show the anticipated financial gain of the early backers. Sample from the Compaq prospectus: "The personal-computer industry is highly competitive and has been characterized by rapid technological advances. Products are vulnerable to early obsolescence."
Weeks before the issue of stock, company officials usually embark on exhausting road shows, making presentations and explaining the virtues of their firms to investors in both the U.S. and Europe. The SEC, though, bars them from making any earnings projections.
When a hot new company finally goes public, ordinary investors typically have little chance to buy the initial shares. Enthusiasm for the company is usually so intense that the underwriter can dispose of all the stock by parceling it out to longtime friends and favored customers. The public is normally able to participate only when the stock is resold on the open market.
The public may be lucky not to be in on the early sale. Stock strategists often recommend that investors wait several weeks before buying a new issue. That gives time for the euphoria surrounding the offering to wear off and for the price to stabilize. Ronald Smolin, president of Philadelphia's American Investor Information Services, warns investors to watch out for new stock offerings that are touted too highly. Says he: "A sense of accomplishment and success has always driven mankind forward, but so too has greed."
The prices of young, unproven companies can be driven up wildly by enthusiastic investors. Apple Computer zoomed from $22 to $29.25 during its first day of trading, while Genentech went on a heart-stopping ride from $35 to $88. But stock prices can plunge just as fast, eroding the paper profits of founders and frightening ordinary investors. Genentech subsequently fell back and is now selling for $38.75. Shares in Victor Technologies, a California-based desktop computer maker, are today worth less than one-fifth of the price at which they were offered in March. The paper fortune of Founder Charles Peddle, once worth $24.3 million, has shrunk to $4.7 million.
The founders of some companies can even find themselves out in the cold. Fortune Systems Chairman Gary Friedman was suddenly worth $26.2 million when his firm, which makes office computers, went public last March. But the company's products encountered problems, and in October Fortune's directors forced Friedman to resign as chairman and leave. Last week the fiery Jack Tramiel, who founded Commodore, the home-computer maker, abruptly quit. He had taken the firm from sales of about $50 million in 1977 to more than $1 billion last year.
Company founders fortunate enough not only to reap but also to keep their winnings sometimes find the attention they receive to be unsettling. The new multimillionaires begin to worry about kidnap attempts on themselves and their families. They erect security fences around their homes, install elaborate burglar alarms and buy faster cars. Sy Merns, founder of Syms, a chain of eleven off-price clothing stores mostly in the Northeast, cashed in some $33 million worth of shares when his company went public in September, and his stock holdings are estimated at more than $110 million. Because of concerns about his safety, Merns refuses to allow himself to be photographed, even though he appears in his own television commercials.
Sometimes such fears are unfortunately justified. Gulfstream Aerospace Founder Paulson's son Michael, 28, was ambushed by two men in front of his Savannah home one night last month. The younger Paulson pulled out a .22-cal., two-shot derringer magnum and killed one of the men. The second was arrested shortly afterward. Police recovered handcuffs, a gag and a tape cassette with a message requesting $1.2 million in ransom.
A few overnight multimillionaires, though, revel in their new prominence. Apple Computer Co-Founder Steven Jobs, who is now worth about $185 million, has toyed with the idea of going into politics and was seen escorting Actress Diane Keaton to a Manhattan disco. When Altos Computer Systems Founder David Jackson began counting his wealth in nine figures, he turned up at the Kentucky Derby with then Governor John Y. Brown and was a guest at a San Francisco reception for Queen Elizabeth II.
Even such pleasant distractions, however, can often become troublesome. "It's easy to get sucked away from running the company," says Allen Michels, whose stock was worth $11.5 million when Convergent Technologies went public in 1982. "Politicians come knocking on the door; donations are sought from charities you never heard of; friends you've forgotten about come out of the woodwork; former adversaries become intimates." Observes Financier William Hambrecht, co-founder of Hambrecht & Quist, a San Francisco venture-capital and investment-banking firm: "Most of the guys who have failed are the ones who stopped listening and got carried away with their own ego. All of a sudden they became folk heroes and started to believe their own public relations."
In this sense, success can be as difficult to handle as failure. "It can lead to complacency, which blunts the ability to perceive new opportunities," says John Kao, a psychiatrist who teaches at Harvard Business School. "The money tends to put you in a different peer group, creating a sense of isolation and the need to seek others who are equally successful. Some rich people feel only they can understand each other."
Occasionally the byproducts of sudden wealth are tragic. The public sale of Eagle Computer stock in June made President
Dennis Barnhart's holdings worth $8.1 million. A few hours after the sale was completed, Barnhart, 40, accompanied by a yacht salesman, drove his red Ferrari off the road in Los Gatos, Calif., and was killed. An autopsy showed that he was legally drunk at the time of the accident.
Once a company's shares are traded on the open market, everything is different for the firm and its founders. The responsibilities of meeting with security analysts, making presentations to Wall Street, taking inquiries from the press and major shareholders begin to eat up large amounts of time. Says Hwang of TeleVideo Systems, who associates say looks ten years older than he did twelve months ago: "Now that I've got public money it really bothers me. I feel more responsible."
The pressure to demonstrate higher earnings in every financial statement becomes relentless. Instead of using revenues to bolster research and development, some companies feel obliged to spruce up their profit-and-loss statement. Says Chief Financial Officer Victor Richmond of Williams-Sonoma, a chain of kitchen-supply stores that went public in July: "Everything we do today is done with the thought, 'Hey, somebody's going to take a look at this.' "
A major danger in the new-issues market arises when companies attempt to sell their stock prematurely. Founders, backers and investment bankers can be tempted to hurry their offerings in the rush to capitalize on rising prices and public enthusiasm. That situation occurred early last summer, when the prices of newly issued securities reached their peak. Observes Sanford Robertson, a founder of Robertson, Colman & Stephens, an investment-banking firm in San Francisco: "In the summer there was a lot of junk. There were a lot of things with too high a price and too low a quality."
Androbot, a San Jose, Calif., company, planned to go public in June largely on the reputation of its chief backer, Atari Founder Nolan Bushnell, and some 4-ft-high rolling robots exhibited at trade shows. Even though the company was less than 18 months old and had lost money on each of the 400 robots it had sold, Merrill Lynch valued the initial public offering at $73 million. Eventually the company and its bankers decided to postpone the issue.
Some business people blame such fiascoes on overeager venture capitalists who drive companies to market prematurely so that they can cash in their stakes. One of their most prominent critics is Intel President Andrew Grove. Grove accuses what he calls "vulture capitalists" of roaming around companies and tempting talented employees with promises of quick riches. He says that venture capitalists are in the process of wrecking some good high-tech firms. Of course, several of Intel's senior executives are partners in venture capital funds. Moreover, the company was started by two scientists who left Fairchild Camera and Instrument.
As the prices of some new issues shot skyward last summer, a few skeptics wondered whether the market had lost its senses. Convergent Technologies President Michels roared with laughter when he was reminded that the market had priced the company's total shares at upwards of $1.25 billion, more than, say, Revlon He joked, "The stock market is a study in exaggerated responses. It is like thinking about the price of California real estate."
The enormous enthusiasm for new issues reminds some observers of the frothy Wall Street markets of the late 1960s. During that period, stock in a company called National Student Marketing, which promoted and sold products to college students, went from $6 to $71.50 before losses began to appear. The price ultimately fell to 88-c-. Four Seasons Nursing Centers of America at that time was building a nationwide chain of healthcare facilities for the aged, and its stock went from $11 to as high as $117 with the help of artificially inflated earnings. It later went bankrupt.
But even though investors sometimes self-destructively bid prices up to the stratosphere, they now appear to be shrewder. Observes Investment Banker Hambrecht: "In the late '60s the market was driven by a public craze totally focused on the short term. Today's new issues have a reasonable chance of success rather than being a patent rip-off of a hot market."
Whatever the possible excesses of Wall Street today, young companies are still eager to take their chances, and investors seem ready to put down their money. Each week a dozen or more new firms surmount the legal hurdles and prepare to endure the vicissitudes of the market. A host of initial public offerings are scheduled for early this year. They include: Integrated Device Technology, a semiconductor manufacturer; Consolidated Stores, which owns two discount retail chains; Dow B. Hickam, a pharmaceutical company; and Vie de France, a chain of bakeries.
More than a generation ago, Economist Joseph Schumpeter predicted in his classic work Capitalism, Socialism and Democracy that large corporations would dominate the economy and crush the entrepreneurial spirit, ultimately leading to the collapse of capitalism. Schumpeter considered those daring businessmen the vitally important actors who give an economy dynamism, but postulated a time when a highly developed economy would have no need for new ventures because all consumer needs would have been satisfied. Wrote Schumpeter: "There would be nothing left for entrepreneurs to do."
In fact, there have probably never been more entrepreneurs at work starting new companies, making new products and creating new fortunes. In addition, they are giving vitality to the U.S. economy. In a new book titled The Technology Edge, to be published Feb. 21 (Simon & Schuster; $ 16.95), Princeton University Professor Gerard K. O'Neill writes: "Risky as venture capitalism is for the investor, it is extraordinarily productive for the country as a whole. It allows good new ideas to be turned into reality, rather than remaining as unfulfilled dreams. It stimulates and nurtures the creation of new companies in high-tech areas, where rapid growth is possible. That growth provides new jobs. And the people working at those jobs are learning skills that broaden their opportunities, preparing them for the decades of rapid change ahead." Thus while the new multimillionaires are making a bundle for themselves, they are also making the U.S. economy stronger.
--By Alexander L. Taylor III. Reported by Michael Moritz/San Francisco and Adam Zagorin/New York
With reporting by Michael Moritz/San Francisco, Adam Zagorin/New York