What Does the Financial Crisis Mean for Innovation? Xconomists Weigh In


Yesterday was a dark day on Wall Street, and, according to many observers, a dark day for our political system. But what does the financial crisis mean for innovation, and what are the key things that investors, entrepreneurs, and big companies should do or not do during such an upheaval? Xconomy asked this question of a panel of our Xconomists, and also asked what the crisis likely means for each of their specific fields.

The responses have been pouring in. You can click a name below to jump to that person’s response, or simply page through the whole post. And we’ll be updating this post frequently as more Xconomists are heard from, so check back from time to time.

Michael Greeley (9/29/08)

Staggering. There is no other way to characterize what we just witnessed. Our elected officials in Congress just put themselves in front of the collective national good. I am sure that their philosophical differences are real but today was a day for compromise. Many millions of investors around the world just spoke—and they did so very loudly. While flawed, the bail-out was a critical first step in what will be a long difficult recovery and it should have passed. There will be significant job losses; many companies will go bankrupt as they struggle to access credit to fund basic operations, much less expansion.

So where does that leave the “innovation economy?” Arguably battered and bruised, but like Rocky, it will answer the bell. Venture capitalists are obviously concerned—less about the losses today in the public markets than what that implies for how long they will need to support a portfolio of private companies that require on-going funding as these companies build their products, develop new markets. Any plans we had for liquidity were suspended months ago. VCs have been focused on building valuable private companies for generations—so now we just need to hold on to them a few years longer. Over many investment cycles it has been proven time and again that investments in innovation outstrip returns investors can get elsewhere.

The bar has been set even higher for the funding of new investments—but expect that there will continue to be investment activity, especially in the early stage marketplace. Entrepreneurs will most likely be asked to take less capital and focus on near-term milestones. Venture-backed companies will be asked to look at aggressive cost-cutting scenarios to understand worst-case scenarios. And VCs will re-evaluate their reserve policies across their portfolios to ensure that existing investments will be adequately supported. Unfortunately for those under-performing companies, expect to see less investor patience and a higher mortality rate than we might see in less volatile times.

Clay Siegall (9/30)

I have experienced a few financial downturns, most recently post-9/11 which lasted into 2003. At times like these, it is important to focus on what you do best, while being careful to utilize the resources that you need, not those that you want. I have observed that most truly innovative ideas come from individuals or small teams that can ask and answer questions rapidly.

For entrepreneurs, financial uncertainty forces efforts to be streamlined. This is often when the best concepts arise as great innovators are excited by and step up to challenges much as great athletes reach deep within themselves to achieve peak performance. Above all, don’t follow others during a downturn as that is a sure way to halt innovation and progress.

Investors should take positions with companies that have a diversified product portfolio and strong balance sheet. It is times like now in which investors … Next Page »

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Bob is Xconomy's founder and chairman. You can email him at bbuderi@xconomy.com. Follow @bbuderi

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8 responses to “What Does the Financial Crisis Mean for Innovation? Xconomists Weigh In”

  1. A lot of the public technology companies have not only been weathering the crisis but have solid P/E ratios at LOTS of cash. Read: expect to see more acquisitions–that’s good for entrepreneurs and investors–but where the incumbents have more leverage. Capital efficiency in building businesses already is coming back and will be even more important in the coming years.

  2. I see a wave of innovation in risk management and substitutes for rating agencies. I also see opportunity to attract and retain the best people.

    One has to keep in mind that in the absence of a shock like this, things would have proceeded as normal. The normal state of affairs for investors is buy, rely on the rating agencies, and hope for the best. Risk management is a cost center.

    I see the long overdue implementation of rigorous forward looking models for credit risk. That would have been harder had the rating agencies maintained their stranglehold and investors maintained their apathy toward scientific risk management.