The exit syndrome

Investing in high innovation industries such as biotechnology and hi-technology has been treacherous business for many. Investors, without a clear understanding of how and where value is generated by high innovation industries, have been making incorrect decisions for many decades with predictable results. The relative ease by which all boats rose on a rising tide, in the 90s, compounded the problem as some still believe that their investment processes have no fault.

One trend has been investing closer to the "exit." For unknown reasons, these investors do not seem to understand that the exit is clearly marked for all market participants in red letters. That is to say, where the exit is for an investment is not the individual investor's secret. Both the market and the potential avenue to exit (say, a pharmaceutical company) both know the existence and characteristics of such exits. Thus, investing closer to the exit cannot be a "strategy" to increase shareholder value.

Another method used by the investors is to "drop in," a "proven" management team on top of a company with obscure intellectual property. The idea here is that the superstars are able to wash off the dirt on the diamond in the rough and sparkle the pockets of the impatient investors. Many are realizing that the "proof," that a management team succeeded somewhere does not necessarily mean that they will do it again.

Some have also been lured by "market size," as a proxy for economic value – especially for early investments. "Demographics," is the most mentioned reason for some early investments. Once again, the fact that large potential markets exist is not a sufficient condition for better investments.

A lack of understanding of how economic value is generated is at the heart of the falling productivity from investments in high innovation industries. Both the innovators and the investors are using incorrect proxies for the selection and design of products and technologies, based on experiences from the last century. The world has changed. Rote learning and application from history will not create value. New business models are needed to shock the industry out of its current doldrums.

Ref : Flexibility : Flexible Companies for the Uncertain World http://is.gd/flexbook