Home How Decoupled is The Innovation Economy From Rest of The Economy?

How Decoupled is The Innovation Economy From Rest of The Economy?

What a week of market mayhem! How odd having that as the backdrop to the Web 2.0 Expo in New York. We have been sounding alerts about the economic backdrop to our world of innovation for nearly a year. Back in February we wrote that this is not our bubble. Since then, the news from the economy has gotten worse and nobody is suggesting it will get better any time soon. Reading the papers is pretty grim (unless you stick to Sports or Arts). Yet we contend that it is not grim in the ‘innovation economy’. Here’s why…

Firstly, start-up events across the globe are crowded to breaking point. OK, perhaps they are full of entrepreneurs who were in college during the technology nuclear winter and are simply unaware that a bomb just went off.

Dot Coms 2.0? Say it Ain’t So…

Maybe we are all just fooling ourselves. When the Internet bubble started to burst in March 2000, most people were saying “that’s them crazy Dot Coms, not us”. Gradually, it was all of us who were in any way associated with technology.

After 18 months, in the summer of 2002, everybody had capitulated. You could buy shares of Rational Corp (the leading supplier of software tools after Microsoft, bought by IBM) for a valuation of $1 billion when they had $1 billion in the bank and $1 billion in revenues (oh, yes, and a couple of bad quarters which made it obvious that nobody would buy software ever again). You could walk into a VC with a patented machine to turn mud into gold and be greeted with a sceptical “but what if gold falls in value?”. You could prove that your $50k software would have $500k savings to a company within 6 months and the response was still “we will get back to you”. The technology nuclear winter was very, very cold.

So maybe it is coming again in the technology business. No more funding, no more deals, no more parties. Maybe the hangover is coming.

Innovation Economy Still Thriving

But it does not look that way from what I am seeing. VCs are saying that their companies are doing well (and not all are hyping their portfolio). It also coincides with what I am seeing from companies that I know well. Companies are either growing revenues or getting more funding or doing both. I have interviewed two founders at the Web 2.0 Expo in New York that have broken into profitability. Even if VCs run for the hills they will be fine. These upstarts are taking business from higher cost alternatives.

I have also heard first hand of big deals from large companies awarded to small, young ventures. And I have seen large enterprises that are working on large social media rollouts.

This is not good for big tech companies. But it does look good for small, low cost, agile upstarts. The smart companies have worked out how to reduce risk for clients. What’s the risk of implementing Basecamp or Zoho?

I call this the “innovation economy” and that is a tad worrying. It sounds like “New Economy” and we all know where that ended up. I did not want to say the “technology industry” as huge parts of the tech industry now simply follow economic cycles. The fortunes of Microsoft, Oracle, Dell, HP, IBM, Cisco tend to rise and fall in line with global GDP. Bigco is not the heart of the innovation economy.

Shift in Power to Smallcos

It is more likely to do with a fundamental secular shift in power from large business to small business. The Internet and Coase’s law would be the theoretical underpinning for that. Something dramatic may have quietly happened, making the playing field not just level for start-ups vs incumbents, but tilted in their favor. It might have something to do with the tools that enable you to run a global business with all virtual operations and almost no infrastructure cost. You can simply scale faster and cheaper than your incumbents.


The market mayhem this week has been unprecedented, far worse than even my worst imaginings and I was thinking it was going to be bad. So this is bad. It will spill over into everything. Many parts of the Web 2.0 industry will be in trouble, specifically those with dependency on consumer advertising or financial services.

But the gritty entrepreneurs are building value and getting profitable and have better opportunities than ever before to get their case heard. VCs who keep their nerve will do enormously well, just as they did from deals done in the 2002/2003 era.

What do you think? Is it tough times for all? Or tough times for the slow and good times for the fast?

Image credit: Thomas Hawk

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