March 13, 2009, 6:51 PM
Why Bad Times Nurture New Inventions
By THE EDITORS
(Photo, left to right: Naum Kazhdan/The New York Times, Paul Sakuma/Associated Press)
Personal computers and canned foods were some of the inventions nurtured in recessions past.
With consumer confidence plunging, the jobless rate rising and the gross domestic product falling at a rate second only to the decline seen in the 1982 recession, there’s little hope of good economic news anytime soon. But some economists and historians point out that such fallow ground can make a fertile bed for seeds of innovation and invention.
What kinds of businesses thrive in recessionary times? How do entrepreneurs get a running start in a recession?
Amar Bhidé, professor of business
Scott Reynolds Nelson, history professor
Rita Gunther McGrath, professor of management
Don Kelly, patent agent
Martin Lindstrom, marketing consultant
The Upside of the Worst of Times
Amar Bhidé is the Glaubinger professor of business at Columbia Business School and author of “The Venturesome Economy.”
The deck gets reshuffled in a recession as habits are re-examined and patterns of behavior are broken, perhaps to greater degree than when things are humming along at a steady state. And that’s what creates business opportunities.
With a downturn, overall incomes, consumer spending and capital expenditures fall, but not to the same degree for all individuals, products or businesses. A 3 percent drop in aggregate income doesn’t mean that everyone’s wages fall by 3 percent. Some will lose their entire paycheck, others will keep what they have and a fortunate few even get raises.
Recessions don’t stop new ventures — they may even help.
The same is true with consumption: we may spend a lot less on new houses but a lot more on new Kindles and iPods. These changes can provide a powerful stimulus for entrepreneurship.
About 20 years ago, I studied 100 founders of Inc. magazine’s 1989 list of the 500 fastest growing private companies in the U.S. Virtually all of them had started between 1981-83 in the midst of an awful recession.
But that didn’t prevent those founders from starting a new venture — in fact, in many ways it may have helped. Several had lost their jobs, so they weren’t risking steady employment — and they were able to hire employees who didn’t have great job prospects on the cheap. Landlords offered leases without asking too many questions about credit histories. Suppliers were willing to wait to be paid.
And even though the old economy and the rust belt was in a deep slump, the personal computer was taking off, and with it opportunities not only for new hardware and software makers but also for retailers, resellers and even magazine publishers.
More than a third of the founders I studied had started computer-related businesses. What were the worst of times for the economy as a whole turned out to be one of the best times for resourceful and opportunistic entrepreneurs.
Wool Suits, Canned Goods and the P.C.
Scott Reynolds Nelson, a professor of history at the College of William and Mary, is the author of the forthcoming “Crash: An Uncommon History of America’s Financial Panics.”
America’s financial panics have often been the periods of its most interesting commercial and logistical innovations. Plummeting commodity prices combined with new observations about manufacturing or trade often suggest new solutions to old problems.
Some of our most storied brands today were born in depressions a century or more ago. In 1815, Britain and her allies had just defeated Napoleon. With the demobilization of the British Navy, British wool manufacturers had thousands of pre-cut wool jackets on their hands. To rescue themselves from bankruptcy in the British Depression of 1815-1816 they started the biggest Navy surplus sale in the history of the world.
In 1819, 1873 and the 1970s, new inventions helped pull parts of the nation out of depression.
Thousands of pre-manufactured wool coats were sold at auction in New York City. A small firm called Brooks Brothers bought them up, added civilian buttons and sold them on Cherry Street at closeout prices. Wholesalers were outraged, arguing that these manufacturers, auctioneers, and cheap vendors offered goods below cost, and should be jailed.
Rather than jailing them, New York City imposed flexible regulations on New York’s auction houses. By 1818, $16 million worth of goods were sold by New York’s 43 licensed auctioneers. The $305,000 in proceeds financed a state-supported canal to Lake Erie. America’s Panic of 1819 came on the heels of the British Depression, but the Erie Canal made New York’s fortune after it was completed in 1825.
The Great Depression of 1873 saw banks around the world paralyzed, making loans to industries impossible. France, Prussia and Austria-Hungary responded to the crisis by imposing tariffs on cheap American grain. They neglected to impose tariffs on manufactured food: tins of beef, beef extract, fruits, and vegetables. That made it possible for half a dozen industrial canners, who had made fortunes during the Civil War providing canned goods to Union soldiers, to create national and international markets.
The names fill our pantries today — Van Camp, Libby, Swift, Heinz, and Armour. They advertised heavily, and relied on federally supported railways to transport their food over long distances. These canned goods fed the British Navy, allowed the settlement of Argentina, Western Canada, and the Australian outback. And so the American manufactured food industry succeeded where most others failed in the 1870s. Two bankers tightly connected to the beef industry — the Lehman Brothers and Marcus Goldman — rode out the financial storm and prospered because they were not diversified, but clung to the Anglo-American cattle market.
The oil shocks of 1973 and 1979 hammered the American Midwestern manufacturing belt that had flourished in the 1870s. During that time, federal investment in military research expanded rapidly. Military designers hoped to design control chips small and rugged enough to withstand the electromagnetic pulse generated by a nuclear weapon.
Hundreds of millions of dollars were invested in these high-speed integrated circuits. Sun Belt cities in central Florida, Texas, and Southern California became the most important centers for this research. By the early 1980s it became clear that these tiny chips could be used for miniaturizing dozens of small appliances: the personal computer, the Walkman, and the portable phone. The Sun Belt became the fastest-growing region in the nation.
In 1819, 1873 and the 1970s, new products helped pull particular regions of the nation out of depression. New marketing and branding tactics and government support of new infrastructure helped make innovation possible.
The Merits of Parsimony
Rita Gunther McGrath, an associate professor of management at Columbia Business School, is the author of “Discovery Driven Growth: A Breakthrough Process to Reduce Risk and Seize Opportunity.”
With business as usual off the table in a recession, people become more open to new and efficient ways of doing things. And they’re forced to show more entrepreneurial discipline — you have to expend imagination before spending money.
Boom times can be fatal to entrepreneurial success.
Tough times can make for good startups and boom times can sometimes be fatal to entrepreneurial success. We can all remember how young businesses that attracted too much capital blew it during the dot-com era. After that bust, the merits of parsimony and growing the business step by step were rediscovered, ushering in smarter startups.
For instance, Michael Mountz, founder of the robot manufacturer Kiva Systems, got started in 2003 by leveraging the talent of his M.I.T. colleagues to build a prototype from off-the-shelf parts in 30 days. He was able to get just enough initial financing from private investors to demonstrate the concept and land his first customers. Since then, Kiva has enjoyed rapid growth in sales to big name clients like Staples and Zappos.
Some services may also have an easier time finding an audience than when times are flush. Consider the eagerness with which many consumers are unplugging their expensive cable subscriptions and turning to innovative on-line entertainment offerings, like Hulu. By some accounts, Hulu is poised to generate $200 million in revenue and has attracted over 3 million viewers in only two years of operations. Some industry pundits claim it will surpass YouTube in revenue by next year. It wouldn’t be surprising to look back on this period as the starting point for a new generation of entrepreneurs.
Board Games and Other Escapes
Don Kelly, a former chief of staff for the United States Patent and Trademark Office, is a patent agent and a licensing professional.
Inventors and innovative entrepreneurs should be smiling. That timeworn proverb about “an ill wind that blows no good” truly applies in an economic downturn. No doubt, in garages across the country, innovators are hard at work as opportunity bangs on the doors. Answering the call, however, will require them to step back and take a hard look at the current environment.
Corporations are desperate for great ideas to boost their bottom lines, but they are most interested in products that can rapidly and inexpensively dovetail into their current manufacturing regimen. This is no time for major capital investment. Companies also want something that will sell easily within developed markets. There’s no cash for huge ad campaigns.
Consumers’ needs and priorities have changed, as well. With ever-tightening household budgets, people are looking for cost-cutting innovations and affordable escapes or distractions from their own private depression. Inventors will note domestic trends toward Internet shopping, clever board games that supplant high-cost entertainment systems, inexpensive household comforts, new gadgets that enhance consumers’ homes and automobiles — both of which will be with them for awhile.
The majority of economy-altering and enduring innovations have emerged from the workbenches of small business entrepreneurs and independent inventors. They have proven their worth through good times and bad, and they’ll do it again.
Sell What They Need
Martin Lindstrom is the author of “Buyology: The Truth and Lies About Why We Buy.”
What do Lindt chocolate, the Rubik’s Cube, French perfumes and a pair of Wellies have in common? They’ve all had increased profits during this recession. The number of products getting these results, however, is small and getting smaller by the day. These brands, which may weather the storm, offer some hints for start-up businesses.
Two concepts apply. First don’t ask consumers what they want; figure out what they need. (No one knew they wanted an airbag, but they knew they wanted safer cars.) In recessions, affordable, small luxuries, like chocolate and perfume, hold their own, as do cheap entertainments like movies.
Second, practical features give consumers a reason to make a purchase. Wellington boots sell because they’re useful — and have clever designs. Products that protect our assets and homes also do well, like anti-virus software. Shopping doesn’t stop in recessions, but consumers need a reason beyond just impulse.
http://roomfordebate.blogs.nytimes.com/2009/03/13/why-bad-times-nurture-new-inventions/?8ty&emc=ty