27 September 2006

Corporation 2020: Lesson From the Dot-Bomb

The dot-com boom and bust is dismissed as a typical speculative bubble, a lesson for those enchanted with the prospect of sustaining outrageous returns for more than a year or two. It could be that. It could also be a signal of something else - a latent potential in our financial system that we've yet to tap.

In today's world, trillions of dollars slosh about the globe in search of high returns. It may be that the lesson of the dot-bomb is that there is now more money than entrepreneurial opportunity. That is, if you have, say, $1,000 but only $100 worth of decent investment opportunities, you either bid up the value of those decent investment opportunities, fund some not so decent opportunities, or sit on your money, which is hard to do when the $1,000 is bidding up the value of investment opportunities so rapidly that they promise a great return.

Prices rise when demand is greater than supply. When there is more money seeking return than there are legitimate investment opportunities, prices of those investments rise ... for a time. There were actually two ways that the market could have reached equilibrium once prices were too high. One was to have prices collapse so that they aligned with returns (and this is what did happen). Another is to have the business market respond to higher prices by creating business investments - increasing quantity of investments supplied to align with the quantity of money used to demand investments (or buy stocks). That is, corporations could have become more entrepreneurial.

The lesson of the dot-bomb market was that the business world simply wasn't able to generate enough investment opportunities. This was a less a failure of the venture capital markets than a failure of corporations to imitate those markets.

Corporations are notoriously risk adverse. No one wants to look bad. Anyone who is able to closely observe management can only conclude that they don't like surprises. By contrast, venture capitalists know that a majority of their investments will bomb and look for successes to more than offset those failures. Within the portfolio of a venture capitalist, only a minority of investments will succeed. Corporations were unable to take advantage of the conditions in the late 1990s - the conditions that made expansion so favorable - because business practices within organizations are more focused on cost reduction and efficiencies than entrepreneurship and creativity.

When NASDAQ fell so far, so fast early in this century, it may not have been a problem of financial markets at all. It may have simply been a problem of corporations being unable to produce what the market demanded - more entrepreneurship.

But corporations are enamored of information and knowledge workers - the key to progress in the last economy. They still see entrepreneurship as something that happens outside of their doors and their policies reveal a blind eye to entrepreneurial possibilities within their organization. Until they change their focus, the latent potential of modern financial markets will continue to go unrealized.


Cody McKibben said...

Wow, awesome take on this subject, Ron! It's very interesting to simply rephrase the problem slightly as you have and say that the market is hungry for more entrepreneurship than there is!

I hope Tom Peters is right and in the next 10 years there will be a white collar revolution in which everyone will become a Free Agent...

Ron Davison said...


I am both more optimistic and more pessimistic than Tom. I seriously doubt that the revolution will occur in ten years and doubt that it'll involve more than about 10% of the work force in less than 20. But I think that even those percentages and that time frame will be transformative. Think about every tenth employee starting new business ventures, new units. It will be very exciting.