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The venture misadventure

Zafar Anjum | Feb. 17, 2009
In the process of engineering a financial recovery, there are two issues that are not being paid enough attention.

The financial crisis is deepening (Japans economy shrinks 3.3 per cent; India warns of growing fiscal deficit); but we are still hearing world leaders holding forth on how this downturn is just cyclical. Some experts are even claiming that they are already seeing recovery in some areas. Others assure us that we have touched the nadir and are moving up with the curve.

To cope with the crisis, corporates are taking desperate steps: cost cutting, lay offs and even choking off innovations. The last is the most serious and the implications of which will only be seen in the future.

In the process of engineering a recovery, two things are being ignored: pumping money into innovations and not focusing enough on small businesses.

Innovation Crisis

Umair Haque, director of the Havas Media Lab, ascribed the current financial crisis partly to the venture economy (along with the Wall Street) in his Harvard Business Review blog, Edge Economy (Asleep at the Wheel of Creative Destruction). Todays macropocalypse is a shockwave of crisesand the venture economy is responsible for one, he says. Todays financial crisis, he says, was preceded by what venture capitalists unleashed a decade ago: an innovation crisis.

Umair says that Silicon Valleys innovation crisis partly led to the breakdown of the economy. His argument gets sharpened when seen in the light of the Obama stimulus package: Why does President-elect Obama have to invest a likely trillion dollars to renew, well, pretty much the entire industrial base of the economyto seed new auto, energy healthcare, education, finance, and agricultural industries (to name just a few)? Because today's crop of apathetic, risk-averse venture investors didn't. (Italics mine)

To buttress his arguments, Umair puts forward the following points that all seem valid:

1.    The hallmark of a failing bank is toxic debt. The flipside is true in venture: the hallmark of a failing venture economy is a significant amount of perpetually uninvested cash, with investment shifting to later and later stages: a clear sign of that venture investors are struggling to, well, make much of an economic difference, much less be disruptive.
2.    While Wall Street became more aggressive in risk-taking, venture capitalists ended up being risk aversenever making the bets they should have.
3.    Imitationnot innovationis woven into the fabric of the 20th century venture economy. The venture capitalists have been investing in all the wrong and same places. Where one pioneer invests, a slew of imitators follow, and so tremendous amounts of cash are poured into the same business design or market spacead exchanges, social networks, and blogging/vlogging platforms to name just a few recent fads.

Finally, Umair argues that a 21st century venture economy needs new DNA. Our leaders have to understand that a future cannot be created with old rules of the game. But do you see this new DNA emerging? Keep your eyes open and look around.

Focus on small businesses

Big companies will NOT pull us out of this mess, said top tech blogger Scobleizer, writing from Davos. They wont hire people in big numbers until AFTER the economy starts turning around.

His solution to get out of the financial mess is to create tons of new small businesses.

This could be helpful but where is the money for them? People who have it and who can invest in small businesses have lost part of their wealth in the market crash. Rich people have had their assets decimated by both the stock market and by Bernie Maddoffs ponzi scheme, writers the blogger. That makes them far less likely to invest in new, small, unproven businesses. Venture capital was down quite sharply last quarter, which proves this trend too.

So, you see the vicious cycle of the need to invest in innovation (new and small businesses) and the cash is drying up for such ventures.

We have figured it out but have our leaders? Thats why I think we are in it for a long haul mate!

 

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