Oct
21

The Tsunami of External Fatigue

By

Innovators and business leaders doing their best to achieve commercial success need to understand the set of innovation fatigue factors that they face. These include personal factors due to the bad behavior of individuals; corporate or organizational fatigue factors reflecting inadequate systems, culture, or flawed judgment; and external fatigue factors due to the burdens of legislation, taxation, and challenges in the patent system, for example. The first two categories are factors where innovators and corporate leaders are in charge. The external category is the most difficult one because the challenges come from outside our sphere of influence, where the best efforts on our part can still face seemingly insurmountable challenges beyond our control.

One of the effects of uncertainty regarding the regulatory climate that business faces is a dangerous reduction in venture capital that is often needed for start-ups to succeed. Consider this ominous news story from Yahoo! about the drop in venture capital funding recently:

Venture capitalists poured less money into U.S. startups in the third quarter and split this among more companies, signaling that investors are trying to be more economical with their funds.

According to a study set to be released Friday, startup investments declined 7 percent to $4.8 billion in the July-September period, compared with $5.2 billion invested during the same three-month period in 2009. A total of 780 startups received funding during the quarter — 9 percent more than the 716 companies that took slices of the investment pie last year.

The study, which was conducted by PriceWaterhouseCoopers and the National Venture Capital Association based on data from Thomson Reuters, said that much of the decline stemmed from a drop in large investments in clean technology. Funding in clean-tech startups, which include alternative energy, recycling, conservation and power supply companies, has been mercurial lately. It fell every quarter last year compared with the previous year, but has been climbing this year — until the third quarter.

This is a genuine red flag, consistent with many red flags that we are seeing. The co-founder of Home Depot, for example, recently criticized the federal government in an open letter to President Obama in the Wall Street Journal (Oct. 15, 2010), explaining that Home Depot, founded during a past recession and now providing over 300,000 jobs to Americans, could never have been successfully founded in today’s climate where government, in his opinion, seems set on vilifying and punishing business rather than helping it to succeed.

We opened the front door in 1979, also a time of severe economic slowdown. Yet today, Home Depot is staffed by more than 325,000 dedicated, well-trained, and highly motivated people offering outstanding service and knowledge to millions of consumers.

If we tried to start Home Depot today, under the kind of onerous regulatory controls that you have advocated, it’s a stone cold certainty that our business would never get off the ground, much less thrive. Rules against providing stock options would have prevented us from incentivizing worthy employees in the start-up phase—never mind the incredibly high cost of regulatory compliance overall and mandatory health insurance. Still worse are the ever-rapacious trial lawyers.

Meantime, you seem obsessed with repealing tax cuts for “millionaires and billionaires.” . . . The wealth that was created by my investments wasn’t put into a giant swimming pool as so many elected demagogues seem to imagine. Instead it benefitted our employees, their families and our community at large.

Business leaders and innovators face many new burdens and uncertainties that can crush delicate start-ups and even thriving businesses. Increasing the burdens right now, whether through more regulations, higher taxes, or other measures with unintended anti-business consequences, seems likely to only increase innovation fatigue at this critical time in our nation’s history. I urge our leaders to carefully consider how small companies and start-ups are being affected, and how venture capital will be affected, by the changes that are being proposed and by the actions they’ve already taken.

It’s time for government to listen to the voice of the innovator.

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InnovationFatigue.com is the official blog for the new book, Conquering Innovation Fatigue. Here we provide supplementary innovation, news, tips, updates, and, when needed, a correction or two, to keep those who are using the big on the inside edge for innovation success.