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


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in the wake of the popping of the Internet bubble and the even-bigger telecom bubble that the level of growth and innovation in both those sectors has assumed remarkable proportions.

Yes, I am an optimist. I believe that human ingenuity mixed with free markets is a powerful recipe for economic growth, improved quality of life and improved standards of living. When credit tightens—as it undeniably will—there will be an understandable skepticism about an innovation’s promise…and then the sullen, gradual, hopeful recognition that—jeez!—this could be a big business opportunity. It’s certainly likely to grow faster than traditional X, stodgy Y, or credit-limited Z.

Will there be a slowing of growth? Of course—just as there was after our millennial bubbles popped. Is that slowdown a sign of “end of days” or the sky falling or the end of market capitalism as we know it? Of course not! We have seen not just the popping of a credit bubble but the popping of the financial services bubble.

It’s time for the “real” economy to assume primacy over the financial economy. It’s time for digital, material, environmental, medical and operational innovators to assume primacy over financial innovators.

Do I think that’s a good thing? No—I think that’s a great thing.

Chris Gabrieli (9/29/08)

Right now, the upheavals in the financial system have very little effect on the venture business or the entrepreneurial innovation domain. Venture funds have multi-year vintages and plenty of dry powder capital, and innovators are driven by their passion and creativity in a specific area. In the past, this insulation, combined with the fact that successful ventures depend on general capital markets’ health three to five to seven years from when they get going, not the current conditions, has allowed VCs and entrepreneurs to quietly go about their business during crises such as October 1987, the real estate crash of the early 1990s, the Long Term Capital collapse, and even, to a surprising degree, our own crisis of the Internet bubble at the turn of the century. But that’s because these crises resolved within months or a couple of years. It is too early to tell what will happen now. The worst-case scenarios would surely hurt all of our fields.

In the short term, I would counsel all involved to stick with the knitting and be glad we are fundamentalists, not market sharpies. If we are working on important potential solutions to important market needs, we will surely find a path to success eventually. However, wise players would trim back expenses, revise plans to assume slower growth and longer ramps, and eschew any strategy that absolutely requires huge amounts of OPM. If nothing else, it is always good to have these plans in the drawer, ready to go.

Finally, I would add that the impact will vary greatly according to market segment. Those of us in life sciences are likely to be very little affected as health care needs and spending have historically been quite recession-resistant. On the other hand, the venture business is more direct-to-consumer oriented than ever in my career, and surely consumers will cut back on spending, especially on newer, less proven and perhaps less critical items. The wild card will be the new class of green tech investments—will they boom even in a bust because of the fundamental shift in the cost of oil and the deep attitude changes around energy and the environment, or will they face troubles as budgets are pared back and oil prices ease a bit?

Ken Morse (9/29/08)

Our top notch entrepreneurs are not oblivious to the sea changes going on around us, but they usually have a much longer-term perspective about the opportunities they are pursuing. Market cycles come and go, but … 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.