Start-ups In A Down Economy - InformationWeek

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Software // Information Management
Commentary
12/5/2008
06:27 PM
Roger Smith
Roger Smith
Commentary
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Start-ups In A Down Economy

Six months ago I mentioned during my pre-employment interview with Rob Preston, InformationWeek's editor in chief, that I belonged to a Toastmasters club devoted to improving public speaking skills, and Rob told me a story about how in college his roommate got so carried away during a Toastmasters speech that he climbed on a desk for emphasis, only to hit his head on a ceiling fan and knock himself senseless.

Six months ago I mentioned during my pre-employment interview with Rob Preston, InformationWeek's editor in chief, that I belonged to a Toastmasters club devoted to improving public speaking skills, and Rob told me a story about how in college his roommate got so carried away during a Toastmasters speech that he climbed on a desk for emphasis, only to hit his head on a ceiling fan and knock himself senseless.I was reminded of that incident this week while listening to a speech by Will Kessler, CTO of a new Web startup, SWM Apps, who was waxing eloquent about his company's new social wish-list app called WishesForMe, which is available now for Facebook users and in the near future for non-Facebook users. An enthusiastic and experienced public speaker, Kessler declared, "Our motto is, 'Give them what they want!' 'Get what you want!' 'Never disappoint!' " during an animated exhortation about why his company's online wish list function was different from so many you can find on online retailers like Amazon.com.

Earlier in the day, I had been reading a compelling new book, The New Paradigm For Financial Markets: The Credit Crisis Of 2008 And What It Means, by billionaire hedge-fund manager George Soros. His main argument is that the standard economic assumption that supply and demand drive prices is only a starting point for understanding financial markets. In boom-bust cycles, he says, the textbook theory is not just slightly inaccurate but totally wrong.

Soros' own theory, which he calls reflexivity, might be summarized this way: i) The idea that markets are self-correcting and tend toward equilibrium is wrong;

ii) Because people make decisions based on an interpretation of the facts and the trends they can perceive, market prices can be manipulated by people's biases;

iii) Investor opinion can shift prices and affect fundamentals, giving out new signals about assets and the economy, which in turn causes a feedback loop that will affect investor behavior even more.

Soros characterizes the present crisis as a superbubble and the worst since the Great Depression since it permeates the entire economy and not just a specific sector such as subprime mortgages. He believes that the current crisis has evolved over the last 25 years because of factors like increasing credit expansion, globalization, the increasing pace of financial innovations, and the decreasing number of financial regulations. Soros' long-term view foresees a long period of political and financial instability followed by the emergence of a new world order where the United States will no longer be the dominant power and the dollar will not be the main international reserve currency.

The main flaw I can find in Soros' speculative argument is his seeming lack of appreciation for entrepreneurship -- or the fact that entrepreneurial activity can be as important as government action in ending economic recessions and smoothing out boom-bust business cycles. Creating new firms is a major activity for many people in this country. According to a 2007 book, Entrepreneurship In The United States, by Paul Reynolds, 12% of U.S. adults are involved in business creation at any given time, which places the United States at the highest level of advanced economies (more than double most European countries). In 2005, this worked out to 15 million people who were attempting to launch 7 million new companies.

By its nature, entrepreneurship is a dynamic activity and hard to regulate. It's about producing a new product or activity or business that did not exist previously -- or modifying an existing activity such as Kessler's Facebook wish-list application. During his Toastmaster speech, Kessler described his application in similar dynamic terms, exhorting his audience that this year, in a down economy, "Don't let your friends get the wrong products; get them what they want and need!" My own wish and hope for the new year is that, with policymakers in Congress actively considering increasing regulatory control of fraudulent businesses practices, they tread lightly to avoid installing roadblocks that will make it harder for entrepreneurs to create new businesses. Plus, in the inevitable heated debates, no one climbs so high on their political soapbox that they hit their head and knock themselves senseless.

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