The Early-Stage Financing of the Internet

Despite the role of the capital markets in supporting innovation in capitalist economies, many promising technologies do not get support. The Internet, for example, was developed in two major stages, neither of which had capital market funding. It was only years later, when the technologies were commercialized, that private capital came in. This was despite efforts of the original builders of the technologies to get private financial support for their capitalization.

In the late 1960s, Bolt, Braneck and Newman (BBN), a private research firm in Cambridge, Mass., received a contract from the American Defense Department's Defense Advanced Research Project Agency (DARPA) to build a network that would connect the computers of research agencies of the government and of government contractors. BBN used packet switching technology to build the network, the Internet. This was the network that was called DARPANET, and building it was a major technological stretch. At the time Bell Labs thought it couldn't be done, and so didn't bid on the Defense Department contract. BBN also developed the server that made the network possible, and labeled it the Interface Message Processor.

In the early 1970s, there were four servers at different universities that were Defense Department contractors, and one at BBN. This was the early Internet.

BBN saw the potential commercial application of the Net and sought to raise capital to build the network. The notion was to sell access to the network to business for various purposes. As part of its effort at commercialization, BBN applied to the Federal Communications Commission and received an exclusive carrier's license for three years. Then BBN sought private equity investment to commercialize the Internet.

But the venture capital community wasn't interested. Principals in the venture firms didn't understand the concept, and the telephone companies recognized a potential competitor and didn't like it. So the venture firms wouldn't invest.

BBN pressed ahead with development of the concept via a research trust limited partnership, but there was neither enough capital nor enough market understanding to make a breakthrough into significant commercial use. The Internet would have to wait for another 20 years for the capital markets to become interested.

Meanwhile the research and defense community continued to use and improve the network. In Switzerland, at the high-speed particle accelerator (CERN), Tim Berners-Lee and his associates needed a way to find items on the computers connected to the Internet and developed the World Wide Web. Again, there was no private capital involved.

Thereafter, young engineers at the University of Illinois, in particular Mark Andriesson, developed a program—the first search engine—to find items on the Web for various purposes, and soon it was in use by the public, especially at universities, for a variety of purposes. It was at this late date, in 1994, that private equity entered the development of the technology via the foundation of Netscape.

Netscape was the first search engine but the public needed a way to access the Web to be able to use it. Along came America Online, and then other competitors, and thus the Internet as we know it today, with its availability to the public, its millions of Web sites, and its commercial applications. All this was some 20 years after just such a network had first been envisioned by the builders of DARPANET. Yet within just a few years after the founding of Netscape and AOL, billions of dollars of venture funds were pouring into hundreds of companies set up to exploit the new technology—leading, in not so many additional years, to the Internet bubble and its bursting.