Here’s Why Economic Downturns Are Good For Innovators and Bad For Everyone Else

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All the way back in 2008, I wrote a piece about why economic downturns are good for innovators and bad for pretty much everyone else. 

As we face a recession in 2020 due to COVID-19, this is still true. The pressures of an economic slowdown actually benefit certain innovative companies that had trouble getting wide-spread adoption before the recession. 

Here’s an excerpt from my article from 2008, Recessions promote breakthrough innovations:

When the economy is booming, little pressure is put on expenses. Large organizations often penalized innovators…[and] companies are ok with spending more money on the same software, the same hardware, and the same advertising mix. 

But…economic downturns force companies to reevaluate how they spend money. Companies need to cut expenditures dramatically yet are expected to have the same level of service as when times were good. This forces firms to look for alternatives to what they are doing.

Revenue pressure forces large companies to get creative. And it’s those smaller companies that are already innovating or can pivot quickly that take advantage. This was true in the Great Recession of 2008 and will be true in the recession forming in 2020. The only difference is where the innovation is taking place. 

Innovation During the Great Recession

Zynga massively benefitted from the economic crash. The company, founded in 2007, was working to transform the gaming industry by creating social-first, web-browser based games. It had modest success with its first game, Zynga Poker, on Facebook in 2007. But it was in its follow up games, Mafia Wars, released in mid-2008, and Farmville in 2009, that the company found product/market as the recession really took hold.

During a downturn, discretionary spending dries up. Consumers turn to cheaper forms of entertainment like movies and video games. Zynga benefitted from this trend greatly. More people were interested in getting their kicks for free online (and socializing at the same time) with video games than they were going out and spending money. Zynga grew stronger from the economic recession and IPO-ed in 2011. 

Photo by Pete Pedroza on Unsplash

Groupon is another example of an innovative company benefiting from a downturn. The company was born on the idea that consumers want to save money with daily deals, and businesses are always looking for inexpensive ways to drive interest and generate revenue. 

The Great Recession was a perfect storm for their business model. In 2008, everyone cut back on expenses. Groupon gave consumers a way to buy products they wanted to try at a steep discount while giving businesses a platform to offer group discounts at scale.

Would Groupon still have been a success without the recession? Probably, but the downturn greatly sped up the timeline for the mass adoption of their product. 

Innovation During the Recession of 2020 (COVID-19)

Just as we saw in the downturns of 2001-2003 and 2008-2010, the 2020 recession will similarly benefit certain innovative companies, just in different sectors. There are obvious winners in today’s environment like video conferencing and work-from-home solutions … but there are also less obvious winners:

Products that help companies save money.

In recessions, all companies reevaluate how they spend money. They are looking for ways to cut costs without sacrificing their core product offering. It’s those innovators who can help other companies save money that benefit from a recession. 

Part of the reason for this is that in a downturn, the CFO becomes the most powerful person at the company. In my article on how your start-up can come out of a recession stronger, I write: 

If you are selling to a company, see if you can sell to the CFO…If your product can save the company money, they are going to be much more interested in using your services. In a recession, finding cost savings becomes very attractive. If the CFO is your advocate based on the numbers, you are going to have a much easier time selling.

In 2001, we saw the rise of Linux because companies realized they could replace expensive SUN boxes with less expensive (but just as powerful) LINUX units. This gave CIOs a ton of benefits and allowed CFOs (remember, in a downturn, they call the shots) to save money when they were most desperate to cut costs. 

Photo by Annie Spratt on Unsplash

The same will be true in this recession. If you have a product that does what your potential customer is doing in-house for 90 percent cheaper, you are going to get their business (even if your software only does 80 percent of what their in-house solution accomplishes). This puts you in a position to benefit from a downturn. 

Products that help consumers save money.

Just like Groupon took off in 2009, we will see a host of products take off in 2020 that help consumers save money. 

Companies like Honey and Earny provide huge benefits to consumers during a recession. Honey is a free browser extension that helps you find and apply discount codes when you’re shopping online. You can add products to a list and have Honey notify you when the price drops, and its Amazon upgrade runs through every seller of your specified product to find you the best price. 

Earny uses the same browser extension approach but gets you automatic cashback when you shop online. It’ll even get you a refund if the price of a product drops after you make a purchase. 

I’ve personally saved over $400 this year using these services.

While there will always be die-hard penny pinchers, these kinds of products have far wider adoption during a period of economic decline than they do during booms. Customers are extremely motivated to save money during a recession and will go out of their way to seek out products that can help them do that. 

Humans also naturally love to talk about the deals we get because it makes us feel good. It gives us a sense of control over our lives when the larger economy is unpredictable and volatile. These products can grow through word of mouth quickly if they provide value. 

Products that provide data. 

Those companies innovating in DaaS should benefit from the looming recession. As I wrote in Data-As-A-Service Bible on the SafeGraph blog in 2019: 

One of the biggest themes in the last ten years has been products that help companies use first-party data better. If you invested in that trend, you had an amazing decade. Those companies include core tools (Databricks, Cloudera), middleware (LiveRamp, Plaid), BI (Tableau, Looker), data processing (Snowflake), log processing (Splunk), and many, many, many more.

And this data is getting cheaper and cheaper to process.

Photo by NASA on Unsplash

The Washington Post recently used SafeGraph’s data to map how people are slowly going out more since the Coronavirus peak. This kind of data can provide the where and why behind the slow march back to “normal” (whatever that new benchmark is). 

NPR leveraged SafeGraph’s mobility data to show a decline in social distancing in the second half of April, while the CDC used the data to help  report on COVID-19.

Most companies suffer severely from economic downturns… but not all of them. Keep your eye on the industries and sectors discussed above. They may actually be stronger on the other side of this recession than when they entered it. 

Special thanks to Thomas Waschenfelder for his help and edits.

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