Can Recessions Be Good Things?

by David Deutsch

Recessions suck. And this recession has been more painful than most: food bank reserves are depleted, children are going to bed hungry, and career opportunities have been thrown in reverse. But I’m going to make a counterintuitive observation: recessions have a significant upside to them, and for those fortunate enough to get ahead of the curve, they can be quite profitable.

This downturn started just as I was leaving grad school in December 2007. At the time I couldn’t buy a job, and I found myself in a very precarious financial position. Growing increasingly frustrated, I began attending networking events across the Southland, at which point I met many serial entrepreneurs. The speakers at these events had taken a bright idea, brought it to life and sometimes sold the resulting firm for hundreds of millions of dollars.

I began looking for behavioral trends to see if I could emulate them. One trait they seemed to share was boundless optimism in general and genuine excitement about this recession in particular. This baffled and insulted me. “Millions are suffering, and these people are excited?” I sniffed. “It’s easy for them to say; they are already rich and don’t have to worry about losing everything they own. How coldhearted can these people be?”

Then, I attended a presentation which changed my perspective. One speaker displayed a trend graph showing how every recession had a correlating boost in technological innovation. A light bulb went off in my head: entrepreneurs don’t see the world in terms of good times and bad times; they simply see shifting opportunities and new ways to learn and grow. In fact, oftentimes they fail in their ventures, but they don’t see failure as a bad thing. Indeed, they seem to be even more excited about their failures than their successes, and venture capital firms actively seek them out for future projects. Again, this is counterintuitive, unless you believe, as I do, that these folks really look for learning opportunities and not necessarily to make millions of dollars on a successful project.

But why do technological innovations happen during downturns? For one thing, innovation isn’t required during good times because, well, times are good: firms are hiring, people have jobs, and all is well with the world. But when bad times hit, people become increasingly innovative to avoid homelessness and hunger. Meanwhile, firms are looking for ways to increase operational output with less money, allowing these entrepreneurs to sell their goods and/or services to willing firms.

For example, I met one woman who developed a climate sensitive water sprinkler; when the weather is humid or rainy, the sprinkler reduces its output instead of simply turning on from a timer. This invention, particularly useful on the water-scarce west coast, uses 33% less water than a regular sprinkler system. Thus, it would be very useful for apartment communities, homeowner associations, and local governments who want to save money in the long run and promote their green credentials.

Another good example of using technology to deliver cost-effective solutions is the increasing popularity of websites such as Animoto. Founded in 2006, this site allows people to upload photographs and add narration, and the site will create a customized movie based on the photos, complete with sound track. At just $250 per year for their premium services, Animoto is a whole lot more cost effective than hiring someone to shoot your video for thousands of dollars a hit. And given how compelling and fun the resulting videos are (check out their samples here if you don’t believe me) this would surely be a hit for firms who are looking to increase marketing without breaking their budgets.

 Furthermore, businesses can do more with less during lean times. When unemployment skyrockets, wages plummet, allowing employers to hire highly-qualified employees for relatively cheap. Sure, this is a coldhearted analysis, but the world can be a mean and nasty place, and this is how employers think.

And, as difficult as this is to say, some jobs will not come back after any recession. See, there are two kinds of unemployment: cyclical and structural. Cyclical unemployment results from a reduction in demand for certain goods and services because people choose not to spend their scarce funds on these things. A good example of cyclical unemployment is restaurants: while cyclical unemployment might shut some restaurants down during bad times, restaurant jobs will return when the economy turns around.

Structural unemployment, on the other hand, is when entire job sectors disappear. Manufacturing is a great example of structural unemployment. Our economy will never again be manufacturing based, and people who were permanently laid off because of structural unemployment need to update their skills to match new economic realities.

In a nutshell, recessions tend to spark opportunities, even as millions are hurt. By no means am I saying we should spread more pain to spark greater innovation. In fact, I think governments need to play a more proactive role in creating stronger social safety nets and training opportunities for those looking to update their skills due to structural unemployment. After all, most people do not have the education, financial resources or professional connections to create enormous wealth during bad times. Nonetheless, it is important to note the silver linings that exist during economic downturns, and those who seek these opportunities have the chance to do quite well for themselves.

If you are interested in networking with entrepreneurs, the Caltech Enterprise Forum
is an excellent place to meet successful ones.

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