When the Market Turns Down, Innovation Should Turn Up
With technology stocks plummeting in the first half of the year, recession fears continue to linger. But demand for some technology is still climbing, so the way businesses tread in uncertain waters can't be a one-size-fits-all approach whereby spending is curbed and headcount slashed. My take on how business leaders should proceed with caution: Be a good steward of your budget but don't skimp on innovation.
It's one of the trickiest questions for tech companies in a market like this when thinking about trimming budgets. How much, if at all, do you scale back your efforts (and associated costs) for driving forth innovation? If you cut back, sure, you can save some cash and satisfy those stakeholders urging you to do so. But when innovation stalls, the door opens for competitors to creep up. And they'll seize the moment.
The parallel has been drawn by Alyse Killeen, a founder and general partner at crypto-focused VC firm Stillmark, to the housing crisis of 2008 that culminated in the Great Recession. In an interview with Fortune Termsheet, Killeen noted the Nasdaq Composite fell 55% from peak to trough. Still, innovation in cloud and mobile technologies led a number of startups to growth and success in the years that followed. It could well be the case we see this happen again. If innovation stalls, growth will too.
Weathering the Storm
When it comes to innovation, over-investing during a looming recession poses risk, but so does the opposite. Researching and developing new solutions in order to identify new revenue streams can be what makes the difference between staying above water or sinking.
And as for who does the innovating, businesses who've focused on upskilling existing talent or hiring apprentice-level workers have fared well. Stock-based compensation packages and VC funded salaries have created extreme inflation for developer compensation, so these tactics can help keep hiring costs palatable while still investing in talent that can bring new products to life.
Through both talent services and a unique approach to working with clients called paired programming, my firm helps clients deliver products to market while training existing staff on new technologies or hiring people new to software development. This approach has helped some large, public companies identify ways to better utilize their assets while driving incremental revenue that, in one case, even helped bring a customer out of bankruptcy. One solution we built with the customer was an easy-to-use portal for rideshare drivers to access compliance documents in order to rent one of the customer's vehicles to use while driving for Uber or Lyft, for example. By helping the customer adjust to the needs of the fast-paced rideshare market and simplify what was otherwise an outdated system and process, they were able to better utilize their fleet and secure a meaningful new revenue stream.
What to Watch For
After a short rebound to start Q3, tech stocks are again reeling. One of the things we can glean from the plunge is that layoffs are in style. Firms with unsustainable valuations and extraordinary cash burn are seeing the grim reaper at their doorstep, and the first thing they cut is headcount. These cuts can be rewarded in the short term by market performance, but losing an edge in speed of innovation will leave firms with reactionary layoffs vulnerable to competitors.
As the tone of investors today feels eerily similar to that of 2008, it can't be overlooked that despite gloomy forecasts from some VCs and analysts, those predictions don't always hit the bullseye, and technology demand in certain sectors can tend to rise in response to hard times (think: spending on products for remote work in 2020 skyrocketed despite a challenging market due to the pandemic). As in every recession there will be winners that rise and beat incumbents. Those winners will be focusing on core critical metrics of their business, funding innovation and striving for clear profitability and cash.