A view from a distance shows that our economy is undergoing creative destruction. New high paying jobs are rare, but hiring at the entry level is starting to pick up. High end real estate values have collapsed, but the market for starter homes is firming up. Exotic financial intruments, including derivatives, are out and good old fashion business is in. High multiple valuations based on discounted future cash flow are out and simple value based on current revenue and asset value is in.
In a lot of ways, the economy is de-levering. Extravagant stock option plans over the short term are frowned upon. Mortgage backed securities have come undone. The quick IPO for venture capital firms is gone.
Derivative leverage in all forms — mortgage backed securities, incentive stock options, financial derivatives, private equity deals, venture capital valuations based upon future IPOs, etc. — always represents a wealth transfer whether obvious or not.
The problem is that our economy got drunk on leverage and forgot to deliver value in return for the hidden wealth transfers. We are now paying the price. Government bailouts, stimulus packages and hardship plans are increasing our country’s deficit — creating another bubble — the value of the dollar. In the absense of new value added, our living standard is soon to be toast.
So where is this new value to come from? Innovation acted upon creates value. I know quite a few people who once had fat incomes that are now working on start ups without pay. Innovation is increasing. There is no better time to innvoate and create value than NOW. The only way to replace the value lost and prevent a devaluing dollar from permanently reducing our living standard is new new innovation.
Whether formed as a start up, internal corporate venture, new product line, or business process innovation, isn’t it time we delivered value first before taking value out with leverage and derivatives? Maybe its time for a simple business model — develop and sell a product, generate revenue and make a profit. What a novel concept that would be!
