Innovation Investments Pay Dividends During Recessions
Dec 15th, 2008 | By Greg Guenthner | Category: Featured, Investing Strategies, Macroeconomics
Fifteen years ago, a Silicon Valley entrepreneur decided to launch his own startup venture. The economy was struggling in the wake of the early ’90s recession. Home values were down across the country, and the national unemployment rate was in excess of 7%. “In other words,” says Wired magazine, “the timing couldn’t have been better.”
Tom Siebel was that entrepreneur, and Siebel Systems was the venture he started back in July 1993. Because of the recent layoffs, Siebel was able to recruit experienced engineers at a discount. He also acquired some cheap office space in Palo Alto and scooped up office equipment at auctions held by failing companies nearby.
Siebel managed to buy up assets at a time when most were selling. He managed to add experienced employees at a severely reduced price, and the payoff was enormous…
After spending less than $1 million on overhead, his product was ready for release in 1995.
After Siebel’s IPO in June 1996, the company became one of the year’s biggest gainers. Siebel quickly become one of the richest people in the country. “It was a great time to start a company,” Siebel told Wired.
With the economy now in complete disarray, many companies may shift their focus to creating and innovating. In addition to the availability of cheap labor, small businesses and startups have an advantage that Siebel didn’t 15 years ago.
With the growing prominence of cloud computing and open source software, new tech companies are able to get off the ground with limited funding. No longer do programmers have to shell out hundreds of thousands of dollars for servers and office space — they can now work from home and simply rent the processing power needed to get the ball rolling and later expand as their business grows.
Take as an example of this new entrepreneurship the story of Steve Demeter. Silicon Alley Insider recently told the story of the programmer who developed the iPhone puzzle game Trism as a side project, but quit his job after making $250,000 in profits after he started selling the game on iTunes for $4.99 this past summer. Demeter’s initial investment in the game’s development was only $5,000. The Trism game is by no means a life-changing innovation, but Demeter’s story does illustrate how much easier it is these days for small companies to get their foot in the door with limited capital.
It’s not just startups however, that look toward innovation during hard times. When the economy is weak, many large companies will look for new sources of revenue. Take as an example some of the famous inventions created during the Great Depression…
December’s Wired magazine notes that in 1935, after being told by DuPont to leave basic research behind in favor of new product development, Wallace Carothers invented nylon. As his competitors were cutting their R&D budgets, IBM’s founder, Thomas Watson, was building a new research center. Douglas Aircraft unveiled the new DC-3 in 1935. Within four years, it was transporting 90% of commercial airline passengers.
In the wake of the current financial crisis, many companies, large and small, are being forced in new directions. If revenue drops, or if funding for an anticipated project falls through, companies will seek out new products and methods in hopes of bolstering their bottom line.
Best Regards,
Greg Guenthner
December 15, 2008
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