INNOVATING OUR WAY BACK TO PROSPERITY -
Why the Next Decade May Be the Most Innovative in the History

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By Thomas Koulopoulos

Whatever your opinion about the billions being spent by the U.S. government to bail out CITI, AIG, GM, Chrysler and others, one thing is clear: large corporations have failed us. Yet we have doled out billions in bonuses to the architects of the failure.


At times, it feels as though we are praising the builders of the Titanic as it slips under the surface, with many of us still on board. When the smartest people in the world (if that can be measured by MBAs and Ph.D.s) bring down our largest financial institutions, and just about trigger a collapse of the global economy in the process, you have to wonder how far off course this ship really is and whether we can ever steer it back in the right direction.

NEW RULES FOR A NEW GAME
 

I recall a discussion I had some years ago with financial legend Dee Hock, the founder of credit card behemoth VISA International, in which he said to me, "We're all playing a new game by the old rules. We just don't know what the new rules are yet." Indeed, at times it feels as though the world around us has increased in complexity 100 fold and yet we are still using the same old rules to try to cope. Where do we start to define these new rules? Well, I'll start by disclosing that I'm not an economist, and that may be a good thing in this case. The collective brainpower of the world's economists, a handful of Nobel Prize winners, and the smartest of the smartest financial minds did little to keep us out of harm's way. In fact it seems as though they drove us into the midst of the storm. And I have to admit, with some shame, that I too believed that they were all smart enough to keep us and our investments safe.

But two things happened to change the rules of the game.
First, financial visibility across and into other economies has become much more readily available. When I say "visibility," I'm not talking just about the ability to view financial metrics across the globe; I am talking as well about the impact of global sentiment and perception through the blogshpere, which is as relevant to an economy's health as anything else. When we react now, we do so as a global population of lemmings heading to a single global precipice-- nice imagery, eh?

Second, the smart folks who made a living covering their tracks by wrapping a small mess in an ever bigger, more complex mess, and who convinced themselves and everyone else that complexity equaled value, got very, very, very good at doing just that. The financial instruments that were being sold were simply impossible to understand. Wall Street had Nobels writing formulas to make the world appear utterly complex and, based on that complexity, convince us that there was some unknown law of the universe at play guaranteeing that these award winners had the insight inaccessible to us simple-minded mortals. I think insight of that magnitude is better termed delusion but, again, what do I know--I'm no economist.

INNOVATE NOW?

So, how can I even begin to talk about innovation?
Easy, without the shadow cast by the corporate canopy of greed and the stale lackluster innovation of huge organizations (think of Detroit), some sorely needed light may finally find its way to ground level, where entrepreneurs, small businesses, and ultimately innovation thrive.

Don't get me wrong. I'm not against large corporations and financial institutions--they are a cornerstone of the economy. But the future of our economy and of innovation is not about large corporations, it's about growing new ideas. Yes, capital is key to growth and scale but I'm not so sure it actually helps to seed new ideas. Hard to believe? Then answer this: What do the following companies all have in common: GE, Allstate Insurance, HP, Burger King, McDonalds, Hyatt, FedEx, Microsoft, Apple Computer, CNN, MTV, Cliff Bar, Method?

The answer is that each one was founded during a depression or recession! Why is it that we so easily lose sight of the upside and the opportunities afforded by a periodic downturn? The need to innovate may seem to be at its apex when the economy is strong but the reality is that a strong economy often leads to more waste, complexity, and irrational invention. Think back to the pets.com sock puppet. It took the economic crisis of 2001 to separate the innovators from the pack.

The same can be said for the current crisis. Financial services, real estate, and insurance all created much more hype and complexity than they did value. True innovation comes out of a lack of capital, resources, and excess, which is why some of the largest players today started in some of the worst economic conditions and why tomorrow's leaders will no doubt emerge from today's crisis.

The fact is that innovation happens best in the trenches, in second bedrooms and garages, in the nooks and crannies of an economy where capital is tight and ideas are limitless. Funny, but that's also where risk is best understood and managed.
The notion of managing risk is not abstract to entrepreneurs and small business owners. It's a reality that goes to bed with them at night and wakes up with them in the morning. If only the same could have been said about so many of the analysts and bankers who simply passed risk on to the next one in line, and then slept soundly believing that it was someone else's problem.

Small business is historically the most innovative part of an economy in a downturn. And it makes perfect sense that the great ideas that drive us out of a crisis are not the ideas that got us into it. But if you're running a small business in a climate of economic despair, innovation is a 24/7 obsession, it's not an optional investment to cut out of the budget until things get better.

If you're unemployed in a climate where the chances of being quickly reemployed are dim, you will try like hell to make due somehow. In the process you will innovate out of necessity in ways you could never have imagined on a full wallet with a day job. Add to that the unprecedented benefit of living in an age of rampant social networking that makes it easier than ever to connect and build a business, and you have an incredible chemistry for the future that portends of an era that may rival even the most innovative periods of the last 100 years.

A NATIONAL INNOVATION ZONE

So what stands in the way of this? It is one small impediment--we need to be at least as committed to helping small business in America as we are to bailing out corporate America.

Small business is efficient, small business is fast, small business is innovative, but at some point small business needs capital in order to get from concept to commercialization. With credit being ridiculously tight, and home equity (a standard funding mechanism for entrepreneurs) continuing to drop, we need to refocus our recovery investment on helping small business.

Amazingly TARP did virtually nothing to directly help small business, and the ARRA (American Recovery and Reinvestment Act of 2009) does little more to incentivize new small businesses. Although it does provide some incremental relief for existing small business, it is nowhere near enough. We need more.
We can begin by creating a National Innovation Zone, a set of incentives and funding mechanisms for small business. The key will be to provide incentives for greater risk taking among small business owners, especially new startups. This could include greater access to guaranteed small business loans from the federal government and substantial tax incentives for small business investment and small business employment. Some of that is already being proposed by the current administration in the form of higher rates of loan guarantees for small businesses.


Yet, naysayers claim that banks will make too many bad loans to small business if the government stands behind them with guarantees. Yes, let's jut plow more money into treating the symptoms of a crisis than into offering a cure. We could also provide greater tax incentives for small business owners to use their own credit to fund a new business.

For example, why not provide outright tax credit for home equity or other forms of debt used to start a new business, rather than limit home equity used for startups to a 28% deduction ceiling. I know of few small business owners who have not relied on home equity to bootstrap their business at some point.

This is probably the greatest financial mess most of us over the age of 30 will see in our lifetime (sorry to those under 30, but your turn will come!). But here is the good news (the optimist emerges from the chaos). It's also the greatest opportunity we will ever have to make some fundamental changes in how we operate in this new transparent, uncertain, flat, interconnected, crowded world. I'm convinced that when we look back on this we will see it as a fundamental turning point in how we built the foundation for the next 50 years of economic growth. I want to be part of that--and that's exciting!

It's time to get back to what makes us innovative and what makes us great, and always has--the spirit of the entrepreneur and the ability to build new businesses. The bottom line is that the passengers of this ocean-liner don't need a bucket to bail out the ship, they need lifeboats to find their own way to safety!


Oh, but did I mention that I'm not an economist?


Thomas Koulopoulos is president and founder of The Delphi Group, a Boston-based management think tank. He has also served as executive director of the Center for Business Innovation at Babson College and managing director of one the service industry's first global Innovation Labs. He is the author of eight books, including his most recent The Innovation Zone on how successful organizations build and sustain a culture of innovation.