Global
27 April 2020

In Recessions, Investing in Innovation is Essential

Written by Siobhan Dullea, CEO of MassChallenge

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We’re in the beginning of a recession of undefined magnitude.

In addition to the closures of restaurant and retail locations for the past month, the ripple effect has hit tech and media companies with significant cutdowns on ad spend and/ or cutdowns on revenue and, in some cases, large layoffs.

When dealing with any crisis beyond their control, the best leaders will work decisively and quickly to save their businesses. But often, because of the churn of a crisis, companies are occupied by and focus solely on the short-term needs for sustaining their businesses; while this is important, what the past decade has demonstrated (and a few more before it) is that these times can also open the door to significant and valuable, longer term opportunities. 

As then American Express CEO Ken Chenault said in March 2008, “A difficult economic environment argues for the need to innovate more, not to pull back.”

And, indeed, data pooled from the early 1980s, early 1990s, and 2001 recession years shows that companies that invested in innovation during economic downturns improved their position relative to their competitors during the recovery period. The researcher of this study, business scholar and economist, Mario Daniele Amore, further emphasized the impact this has with industries where disruption is most possible: “The effect of past recession R&D is much stronger and statistically significant in industries with high technological opportunities and in highly competitive industries.”

Today's business leaders should keep their eyes - and their businesses - focused on the future. But this doesn’t mean that companies need to double down on their own research and development initiatives or start a whole new internal department. Corporate leaders can efficiently increase their innovation efforts by continuing to cultivate relationships with and invest in startups.

We are ramping up our efforts to invest in entrepreneurs with big, bold ideas that will change our world. Help us support entrepreneurs by donating to MassChallenge today

How have innovation ecosystems progressed since the 2008 recession?

A major driver of economic growth after the 2008 recession was the proliferation of startups, including the then-startups that became household names. In 2011, Brian Resnick wrote in The Atlantic, “Economic hardship has not, it turns out, kept U.S. entrepreneurs from thinking, innovating, or taking risks on new businesses. During the toughest months of the financial downturn, start-up activity actually surged.”

2009 saw more than half a million new businesses launch and the national index for entrepreneurship rise: Dropbox (2008), Uber (2009), Venmo (2009), and WhatsApp (2009), to name only a few, created technology so vital and so disruptive that it completely transformed the competitive landscape. The surge of these new solutions forced established companies to play catch up even well beyond the recovery (see examples like Zelle from Bank of America).

Companies navigating the current crisis have a relative advantage over their 2008 predecessors because the right channels and networks already exist in the form of startup accelerators, and accessing these ecosystems allow corporate leaders to tap into the innovative tools and technologies that will help build our post-COVID-19 future.

This formation of innovation ecosystems is a crucial development. Cities like Boston, Austin, San Francisco, and New York responded by forming large innovation ecosystems to support these emerging startups, bringing together essential stakeholders (government, academic institutions, industry leaders, and venture capital) to make it as easy as possible for other entrepreneurs to launch new businesses, creating new jobs and solutions for the market.

Additionally, attitudes around startup-corporate collaboration have shifted significantly in the last decade. From viewing a startup as a competitor or potential acquisition target to the emergence of corporate investment in innovation ecosystems and external accelerators and incubators. In fact, the number of corporate investments in startups tripled from 980 in 2013 to 2,795 in 2018, with their total value growing from $19 billion to $180 billion. More and more, industry-leading organizations are already partnering with startups to advance their businesses.

So, what are the next steps, or first steps to effectively innovate through a crisis?

Ensure your innovation foundation is strong. Under normal conditions, any organization should be well-organized, deliberate, and strategic about engaging with startups; when you look to innovate through a crisis, this is absolutely vital. Organizations should first ensure they have the right foundation in place:

  • The company has a strong internal innovation team that fully grasps the risks, challenges, and opportunities of working with startups. The company’s C-suite fully supports the innovation team, and its decision-making. Leadership understands that the innovation strategy is an essential element of the business.
  • The company understand its pain points and motivators for working with a startup and is committed to building a “win-win relationship” in which both sides benefit.
  • The company understands its risk tolerance and has built its startup engagement or investment strategy with its risk tolerance in mind. For example, understanding that working with a new technology takes a willingness to invest in progression through a pilot program and/or eventual acquisition.
  • The organization knows how the startup will fit into its business and understands what stage of startup best fits that strategy and has developed strong criteria for vetting startups.

Get out there. Strengthen your company’s relationships with the established innovation ecosystems, entrepreneurship programs, and super-connectors that can partner with you to navigate this crisis. These organizations can help you to:

  • Trendspot: Monitor and engage with the emerging trends and technologies that might disrupt your – or your competitor’s – business during the economic recovery.
  • Get access to the right startups at the right time: Identify which startups are truly ready to partner with your company.
  • Engage more effectively and efficiently with startups: Provide consultative support and guidance on how to work with startups to add incredible value to your business while sharing your company’s industry expertise, resources and connections that enable the emerging business to grow.

Think forward. In uncertain times, we can be reactionary to a fault. While the difficulties of the moment must be addressed carefully, being too cautious can leave you blind to bold thinking and problem solving, that tomorrow’s leading entrepreneurs are developing. After all, the innovators are responding in their way to the moment hand as well, by innovating. 

Economies adapt and move forward. They always have and always will. Staying open, involved, and active in innovation is actually the less risky move than closing up and trying to weather the storm. Because when the storm ends, the landscape may look a whole lot different.

 

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Mission

MassChallenge strengthens the global innovation ecosystem by accelerating high-potential startups across all industries, from anywhere in the world.