Why the Tech Industry Helps Pull Us Out of the Worst of Times

Kevin Maney writes: The morning's news about AIG brings a broader sense of dread. Financial companies keep imploding. Real estate still sucks. Even though the economy as a whole is still sort of OK, there's a sense it will get worse, and a question of how we'll pull out of it.

This is where the U.S. technology industry gets interesting. Unlike in a lot of industries, bad times tend to spawn great things. Hewlett-Packard got its start in 1939, while the country was still trying to claw its way out of the Great Depression. Microsoft got started in 1975, a year of recession, rampant inflation and 9% unemployment. Time ran a cover story that July titled, "Can Capitalism Survive?"

In 2002, I wrote a lengthy story about a start-up, Good Technology, that was launched in the teeth of the dot-com meltdown of 2000. The story is not so much about Good as it is about why a nasty downturn helps new technology get created. Some of the things that go into that soup:

-- In bad times, established tech companies slow down and IPOs all but stop. (H-P is even cutting 24,600 jobs, the company said today.) Ambitious people employed by those companies see their chances at stock-based wealth shrink, so have more incentive to strike out on their own and start something new.

-- As the instant money from IPOs and buyouts disappears, start-ups have incentive to take longer to develop deeper and better technology that could have an even bigger payoff down the road. It's those technologies that often have the biggest impact on life, business and the economy.

-- VCs and other investors get pickier, raising the bar for what they'll invest in. So new ideas have to be better.

-- Once companies get started, they have an easier time hiring talented people -- because those people are either more willing to leave their existing (and slowing) employers, and because there's not a zillion other start-ups chasing them.

-- The cost of operating a start-up plummets. As I wrote in my 2002 story: "Good's rent is $4 a square foot. In 2000, it might have been 10 times that. Most of the furniture belonged to Fogdog, an online sporting goods retailer that filed for bankruptcy protection. Good bought the stuff for about 10 cents on the dollar." All that means that more money can go into the technology and hiring talent.

There's a whole lot more to it, but that gives you a taste of what goes on. The result keeps the tech industry alive and vibrant even when the rest of the economy looks grim. New companies and products that matter emerge, helping to create wealth and lead the way to better times.

The cycle has repeated over and over again, so I have confidence that won't end now, just when we need it.

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