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


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whether or not this will hurt or help innovation. I do believe that that the smarter companies will emerge stronger and in a better position to take advantage of the capital markets when the window opens. They will have made good decisions with limited information. This argues in favor of innovation. One can also argue that less capital is available to fund new ideas. An argument against innovation. Both of these facts are true and the real answer as to whether or not innovation will slow down as a result of this downturn is that innovation will always win out.

Another aspect of the current capital market situation that will hit home with all companies over the next few months relates to the 2009 budgets. As the cost of capital increases, it will force biotech companies to decide between funding their lead development programs and funding research. One can never cut enough discovery research to pay for clinical development. However, I believe more companies will be forced to do this over the next year. As we all know, development programs provide more to the overall valuation than do research programs but the cost of maintaining a development program relative to a discovery program is an order of magnitude. Companies will focus on value creation in the short term, giving up the long term value creation of discovery research. It is a difficult capital market and the stronger companies will figure out ways to balance these activities so as not to give up innovation to fund development.

So in the end, valuations will drop and companies that are cash rich will find the lower valuations of innovative companies to be an acquisition opportunity. They will be buying companies that can’t find capital from other sources. Don’t get me wrong, this is good for the industry and will lead to further innovation. Time and again, this has proven to be the case. When value creating acquisitions occur, those same entrepreneurs start anew. And the cycle continues.

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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.