Two major policy shifts are set to unleash significant capital into the market: declining interest rates as the Federal Reserve pursues its 2% target, and anticipated corporate tax and regulation reductions. While a potential influx of capital might typically trigger a wave of acquisitions and stock buybacks, the post-pandemic business landscape has fundamentally changed. Companies hoping to simply buy their way into innovation are about to discover there aren’t enough promising targets to go around.

This scarcity of acquisition targets, combined with renewed cash flow, will force many large corporations to return to a strategy they’ve largely abandoned: big-swing internal innovation. There’s just one problem – after years of optimizing for incremental improvements and feature maintenance, most corporate teams have lost their capacity for transformative innovation. The innovation muscle has atrophied in many organizations, and that’s not easy to rebuild.

The Acquisition Drought

The pandemic and subsequent economic turbulence made it exceptionally difficult for new businesses to gain traction. After a COVID-driven tech boom in 2021, companies got squeezed in 2022 by rising interest rates. The buzzy rise of AI soon after meant that any startup not focused on artificial intelligence languished. 

Those that survived often focused on niche solutions with limited scalability – a stark contrast to the ambitious, market-disrupting startups of the previous decade. This challenging small business environment has created a unique scenario across the entire economy. Because unlike previous periods of corporate cash abundance, there simply aren’t enough promising companies to acquire. 

What’s more, the traditional “acquihire” strategy – buying smaller companies primarily for their talent – has lost its effectiveness. With major tech layoffs flooding the market with experienced talent, companies no longer need to purchase entire organizations to access skilled teams. This shift, combined with the scarcity of scalable acquisition targets, means corporations will need to look elsewhere for innovation.

The Innovation Readiness Gap

When corporate executives turn to their internal teams and demand big-swing innovation, they’re likely to be disappointed. These teams have spent years being rewarded for and focusing on incremental improvements: solving customer support tickets, maintaining existing features, and delivering predictable quarterly releases. They’ve been actively discouraged from pursuing riskier, more transformative initiatives.

This focus on incremental innovation isn’t just about skills – it’s about mindset, processes, and organizational muscle memory. Teams can’t simply flip a switch and start delivering breakthrough innovation because an executive demands it. The capabilities required for transformative innovation are fundamentally different from those needed for incremental improvement.

The AI Wild Card

The rise of artificial intelligence adds another layer of complexity to our collective innovation challenge. While AI presents tremendous opportunities, it also demonstrates why technical capability alone isn’t enough. We’re already seeing examples of well-funded AI startups led by brilliant engineers who lack the domain expertise to effectively deploy their technology. When these companies inevitably get acquired, their technical capabilities often fail to translate into meaningful innovation within larger organizations.

This pattern reveals a crucial truth: successful innovation requires more than just technical prowess or access to cutting-edge technology. It demands context — deep understanding of user needs, market dynamics, and organizational capabilities – exactly the kind of comprehensive perspective that many teams have lost while focusing on incremental improvements.

The Defense Imperative

Another significant shift is occurring in boardrooms across America. Investors and board members, having weathered recent economic turbulence, are asking more sophisticated questions about defensive strategy. They’re no longer satisfied with pure growth stories – they want to see how companies are building defensible positions while pursuing expansion.

This isn’t about choosing between growth and defense; it’s about pursuing both simultaneously. Companies need to develop more nuanced product strategies that balance aggressive growth with building sustainable competitive advantages. This dual mandate makes the innovation challenge even more complex.

The Path Forward

For corporate leaders, the message is clear: 2025 will require a fundamental rethinking of innovation strategy. The easy path of acquisition-driven innovation is narrowing, while internal teams lack the capabilities for transformative innovation. This gap creates both risk and opportunity.

Organizations need to start rebuilding their innovation capabilities now. This means:

1. Reconsidering how teams are structured and incentivized
2. Developing frameworks for evaluating and pursuing bigger innovation opportunities
3. Building partnerships with external innovation experts who can supplement internal capabilities
4. Creating space for teams to develop and exercise their innovation muscles

The companies that recognize this challenge and act quickly will be best positioned to take advantage of the coming capital influx. Those who wait for the money to arrive before addressing their innovation readiness will likely find themselves unable to effectively deploy their resources.

The return of big-swing innovation is inevitable in 2025. The only question is whether companies will be ready for it.