can generate large returns if they take advantage of the discounted stock prices of companies that are making great progress. Investors should consider reducing their exposure to companies that have a poor track record of hitting corporate goals.
For big companies, now is an incredible time to utilize their enviable cash position to acquire innovative companies. While big and small companies have both seen their share values erode, large companies often have substantial cash positions that obviate the need to utilize equity in a transaction. Big companies normally focus on acquiring approved products (low risk) or novel technology (distant risk). They should use this time to acquire near term products, which are normally shunned by internal big company champions. With depressed stock prices, such deals are more appealing even to the most risk averse.
For biotechnology, it sometimes feels as if we are always in a financial crisis. The timelines of drug development are long, the costs are high, and the investors are impatient to say the least. Due to being in a relatively constant state of financial crisis, biotechnology may be more equipped to ride out a downturn than other industries. It is likely that there will be less expansion and hiring as companies will focus on the top products in their pipeline. We may also see more company to company deals that can provide the smaller of the two companies with necessary capital at a time like now when it is difficult to raise dollars with VCs or on Wall Street.
Michael Schrage (9/29/08)
There are several thoughts that come to mind as I read the extensive—and not very good—coverage of the ongoing financial crisis. (I make an exception for the Financial Times, whose journalists and columnists do not seem to have slept with every hen in Chicken Little’s coop.)
The first is that I am both fascinated and flabbergasted not by the “failures” of regulators or the bizarre willingness of banks to lend to lend large sums of money to people who should only have access to smaller sums or the even crazier behavior of trusting unproven and untested financial instruments as a dominant source of growth…but by the complete, utter and total inability of the boards and directors to have (apparently) any clue as to how exposed and leveraged their institutions were. These boards—which have very highly regarded and exceptionally well-paid establishment types as directors—have failed in their fiduciary duties. They were supposed to represent the interests of shareholders (investors) and they did a miserable, miserable job.
How does this relate to the future innovation economy? Barring a complete economic collapse—that is to say, rioting in the streets, the disappearance of savings and retirements accounts, triple-digit inflation and unemployment skyrocketing to 20 percent—I think this is fantastic news for innovators.
Here’s why. The financial sector was—in the words of Harvard’s excellent Ken Rogoff—clearly “overbanked.” The financial services sector will now be as tightly regulated as the pharmaceutical industry. The bankers (commercial and “investment”—ha ha ha) will be forced to practice conservative and fundamental finance for the foreseeable future.
This begs a simple and obvious question: where will better-than-average growth investments come from in this environment?
Well, I don’t think it will come from a new restaurant concept or “better” candy bars or “cheaper” automobiles or Project Runway fashion breakthroughs. I think it will come from genuine innovations that offer genuine value in, say, consumer electronics, office productivity, energy efficiency, new materials, and medical devices.
In other words, when you blow away the foam and froth and flush away the poor quality crap, the reality is a bright, clear, crisp and refreshing well of innovation still flows. Your readers should draw no small sense of satisfaction from the fact—not the perception—the fact that
