With the recent inflationary spike that we’ve seen on a global basis, startups have borne the brunt of these changes. From the impacts of the Great Resignation to the overall rising costs of doing business, startups are having to grapple with these unprecedented challenges. One major factor that has influenced these challenges is the increasing financialization of the economy.
What is the financialization of the economy? It is the increasing influence and importance of financial markets and financial institutions on the health of a country’s overall economy (“Financialization”. Investopedia. https://www.investopedia.com/terms/f/financialization.asp. Accessed: March 21, 2022.).
Why has the financialization of the economy become a major topic of discussion? There are an increasing number of individuals that view the financialization of the economy as the crux of the issues that society faces today.
Thanks to technology, a wide variety of industries have been further “financialized”. From critical commodities such as oil and gas to human capital talent, the further financialization of the economy has been increasing. Many would ask, what do we mean by further financialization?
While critical commodities such as oil and gas have always been at the whim of the markets, particularly when it comes to pricing, the reality is that technology and changing business models have accelerated the pace and reach at which the markets operate. It is the pace and reach which is of increasing concern to many individuals and organizations.
There is no doubt that the financial markets have moved quickly. Since their inception, financial markets have always pushed societal and individual limits. Whether it is creating new financial products that push regulatory boundaries or leveraging technology to transact faster, financial markets have always been innovative. Sometimes faster than society can handle.
Perhaps society is entering another era where the combination of technology and new business models within financial markets is causing too much change too fast for an even broader swath of society. What do we mean by moving too quickly for society to cope, not to mention a broader swath of society?
One only has to look at the ramifications that we are currently seeing with commodity prices versus the ability of organizations and individuals to adapt to changes. As commodity prices continue to rise at an unrelenting pace, organizations and individuals are leveraging existing tools to cope. These tools include reducing purchases of expensive commodities and finding substitutes. Can these methods continue to work in these financialized times?
The answer is a strong maybe. While these methods may have worked in the past, they only provide short-term relief and aren’t necessarily effective over the medium-term to long-term. Indeed, while there will be a small number of individuals and organizations that will profit from such short-term volatility, there will be many others that will be harmed by it, particularly startups.
Startups, in many respects, have always been at the whim of timing and market circumstance. If a startup goes to market too early then they may find themselves without revenue and be forced to liquidate. A startup that goes to market too late may find themselves outclassed by larger existing competitors. However, if a startup can read the market trends correctly and manage to get their product out when demand and interest are at their peak, they have the opportunity to become a unicorn.
How does the financialization of the economy impact the sustainability and the growth potential of startups? While there are some that would argue that startups are able to capitalize on these rapid market changes whether through their nimbleness or their direct role in driving the financialization of industries, there are others that question whether that will be the case over the long term.
Startups, whether they realize it or not, need some semblance of stability and order to perfect their business model and product. Everyone forgets that today’s big name technology companies such as Google and Meta took many years of research and development as well as experimentation to reach the heights they have now achieved and will continue to achieve in the future. These big name technology companies will definitely be able to weather if not capitalize on the financialization of the markets. It is the smaller startups that will have a harder time.
Without the financial cushion of larger technology companies, smaller startups will find their ability to build new products and services impeded thanks to unpredictable input costs. It is not only high input costs that could be impacted but also overall operations as well.
Startups with significant burn rates and minimal revenue may find themselves having to dedicate resources to monitoring costs and supply chains versus making product improvements. A scenario that leaves society poorer due to reduced product improvements and slower growth.
Another consideration is that the type of startups society would see would dramatically differ. Instead of truly innovative startups pushing the boundaries of science and technology, society may be left with startups that merely repackage existing technologies into slightly different business models. Great for short-term profitability but lousy for long-term sustainable growth and innovation.
There is no doubt that some startups will thrive in the continued financialization of the economy. The question becomes whether or not those that thrive are the startups we need to succeed for long-term sustainable growth and innovation.
There are some that would argue that regardless of the economic conditions, successful startups will find a way to survive and thrive. There are others though that would argue that society might be taking a detour towards a dead end when it comes to true scientific breakthrough and innovation. Only time will tell which side of the argument will win.
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