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March 24, 2009

Venturing Our Way Out of the Dark

Catherine New
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Consumer spending typically falls during a recession, but does that mean that entrepreneurs have to wait until the economic clouds have passed to introduce new products?

Just the opposite, says Professor Amar Bhidé in a recent New York Times Room for Debate blog post. In a recession, Bhidé says, consumers are forced to reexamine their behavior — and it is in this “reshuffling of the deck” that entrepreneurial opportunities are born. Bhidé, author of The Venturesome Economy, points to the early 1980s as an example of how a changing economic landscape paved the way for many successful businesses:

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.

Bhidé expands on the importance of consumers’ continual thirst for innovation in a recent op-ed published in the Wall Street Journal. He writes, “The venturesomeness of consumers has nourished unimaginable advances in our standard of living and created invaluable human capital that is often ignored.”

He cites the personal computer as a product whose success was driven by forward-looking consumers who, despite a challenging economic environment, were willing to change their purchasing behavior and adopt an innovative new product.

History suggests that Americans don’t shirk from venturesome consumption in hard times. The personal computer took off in the dark days of the early 1980s. I paid more than a fourth of my annual income to buy an IBM XT then — as did millions of others. Similarly, in spite of the Great Depression, the rapid increase in the use of new technologies made the 1930s a period of exceptional productivity growth. Today, sales of Apple’s iPhone continue to expand at double-digit rates. Low-income groups (in the $25,000 to $49,999 income segment) are showing the most rapid growth, with resourceful buyers using the latest models as their primary device for accessing the Internet.

The takeaway? Purchases of cars and other big-ticket items may be down, but consumers are still willing to pay for innovation — and that may be the ladder we need to climb out of this dark economic hole.

Photo credit: Fr3d