Platt Perspective on Business and Technology

Innovation, disruptive innovation and market volatility 1: considering businesses and outside investors and their dynamics

Posted in macroeconomics by Timothy Platt on May 17, 2014

I have written a number of times in this blog about innovation and from a variety of perspectives including:

• Innovation from a crowd sourcing and social networking perspective (see for example, my series: Crowd Sourcing, Open Innovation and Open Organization at Social Networking and Business, postings 44-46 and: Social Networking, Community and the Pace and Shaping of Innovation as can be found at that same directory page as postings 133 and following),
• Innovation from the perspective of the individual innovator (see for example: Startups – Good Structure and Process are There to Support Innovation and Individual Achievement,
• From the perspective of the consumer and end-user (see: Planning an Innovative Offering to be Turn-Key Ready at Business Strategy and Operations – 2, postings 222 and loosely following),
• From the perspective of the organization and the creative team (see: Keeping Innovation Fresh at Business Strategy and Operations – 2, postings 241 and loosely following for Parts 1-16, and Innovators, Innovation Teams and the Innovation Process, same directory page postings 366 and loosely following for its parts 1-13 and with that series continued onto Business Strategy and Operations – 3 as postings 402 and loosely following for Parts 14-19),
• Innovation and startups (see for example Innovation Oriented and Access Oriented Startup Strategies and related postings, and more recently
• Innovation and its impact upon, and shaping by supply chain participation (see: Considering a Cost and Benefits Analysis of Innovation at Macroeconomics and Business, postings 162 and loosely following.)

And along with discussing innovation in products and services offered to the consumer market and in business to business contexts, I have discussed the value and role of innovation in creating and improving internal business operations and processes as they make the organization more agile, responsive and cost effective. I will simply note here that that is a theme that has run pretty much continuously throughout this blog.

My point in offering this brief and I add still incomplete innovations-related reference listing is to note that I have written about innovation as one of my core ongoing themes for this blog as a whole. And I note in that context that I expect to continue to do so. But I switch directions with this posting, to begin discussing the role and impact of innovation on business investment and on investors and investor marketplaces, and on capital investment as it shapes and influences businesses and their capacity to innovate. I begin this new series with the above very partial listing of previous innovation-related postings because the core issues of this series connect directly into every other area and aspect of innovation and its expression that I have been writing about.

And I begin this series and its discussions with the fundamentals and with consideration of the dynamics of business and investor relationships – or rather I would offer here a first step outline of one facet to that. I will discuss in-house investment in innovation in this series but I begin here considering outside investors and the dynamics of their relationships with the businesses that they invest in:

• A well run business that seeks to profitably stay in business, long-term, plans and builds for that long-term and both operationally and strategically. This holds independently of how innovative and cutting edge that business seeks to be on an ongoing basis for what it brings to markets and to its customers and to the end users of its products and services.
• This long-term competitive capability depends in developing and retaining both non-liquid resource bases, and liquidity with directly available cash reserves and with reserves that could readily and rapidly be converted to cash if needed. This, and particularly direct cash reserves would be drawn from at a rate that was at most equal to their incoming revenue-based liquidity replenishment rate, for meeting ongoing standard operating expenses, and with revenue coming in added back in to maintain cash reserves stability through earmarked ongoing revenue stream sources.
• Liquid reserves would also be added to and drawn from to support and fund growth and evolutionary change in the business, and to meet any unexpected expenses or cash-requiring challenges.
• And for the specific timeframe details that would be planned for in this system, depending on the specific business and its business model and industry, a stable and well run business’ leadership would seek to develop and retain a liquidity reserve that would be sufficient to cover all working expenses for that organization for at least some minimum number of months, as if there were not going to be any incoming revenue to replace cash outlays during that period.
• A lot of businesses perhaps arbitrarily set their desired minimum cash reserves at a level that would be sufficient to meet basic ongoing expenses for at six months: two full business year quarters, though I am not going to delve into how such a number would be reached here, at least in this first installment. I simply note that this type of minimum timeframe cash reserves cushion would be strategically settled upon as a considered financial benchmark and as part of a business’ basic strategic and operational due diligence processes.
• And for businesses that seek long-term stability, competitive strength and capacity to grow, maintaining a due diligence determined reserve fund and working capital invariably takes precedence over withdrawing cash value as personal profit by the business’ owners, and certainly when that would mean systematically and repeatedly withdrawing value beyond some set salary or salary-like limit or taking salary compensation that would serve to drain needed reserves. I have seen business owners violate this principle and I have seen their businesses suffer and even go under as a result so this is an important point.

And that is also the point at which I turn to consider outside investors, and the other side to this dynamic here:

• Investors make cash or otherwise monetizable investments in a business, parking some of their own direct liquidity and/or other sources of value in it. They may do this as a long-term investment in which case their interests can align closely with those of the business owner and with that business’ hands-on leadership – who might or might not be the same people.
• But investors also make short-term investments. And in either case: long or short-term investment, their goal is to generate personal revenue from that, and both to make their money work for them and bring them profits, and to do so at performance levels that would offset any risks taken on their part from investing in this business.
• This applies to angel and venture capital investors who buy into startups and early stage companies.
• This applies to stock market and other investors who buy in on a business that has reached a point in development where it would make sense to go public and tender an initial public offering, and whether the stock certificates that investors would buy do or do not grant them decision making voting rights in that business.
• This applies to subsequent and longer term stock market participants who take on and sell off stakes in this business through the purchase and sale of stock shares.
• Investors may want to see the businesses that they invest in succeed long-term, but their focus is on generation of revenue that can be siphoned off as profits, and that would be distributed to them.
• And to pick up on just one of many possible details from my business-side list from above here, a business and its outside investors can take very different perspectives on how much liquidity to keep in reserves in a business with investors pushing to draw out more of that value as profits than a strictly business-sided analysis might arrive at.

This dynamic shapes and at times significantly skews how a business is formed and how it grows and develops, how its strategy and its consequential operations are managed and benchmarked and how they are performance reviewed. And this shapes if and when and how, and how rapidly the business innovates and in what directions and with what levels of expense and consequential risk. And this observation brings at least one of the core sets of issues that I would discuss here in this series into a more clearly identified focus.

I am going to continue this series in a next installment with a focus on change and innovation per se. I will develop that line of discussion for this series in terms of a basic taxonomy of types of change and of the timeframes involved in it, that I will at least begin to present in Part 2. More specifically, my goal there will be to develop a model of change and innovation that I can use as a foundation for a more detailed discussion of the issues of investment and how its decision making processes inform innovation and its management, and how realized innovation and its development efforts in turn shape investor perspectives and strategies. Meanwhile, you can find this and related postings at Macroeconomics and Business.

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