Sunday, February 22, 2009

One Benefit of the Financial Crisis

A couple years ago, at the height of the market, some new companies entered into my industry (the fantasy sports industry). They were funded by investment (I think venture capital money), and they spent a whole bunch of it hiring people and marketing themselves. They made a nice splash at the conventions because they'd sponsor events and they'd spend money on advertising with other companies. Sure, they had a business plan of sorts, but not a realistic one given the amount of people they hired and the amount of money they were burning through.

Having seen a number of these outfits come and go, it occurred to me that in a good economy, one where there's plenty of extra money lying around, all it really all it takes is someone who is good at pitching investors to create these pseudo businesses. They raise money, throw it around, act like big shots, spend their way into a modicum of market share, then, if the economy's still good, ask for more money; if it isn't, they fold.

One beneficial side effect of a bad market is the elimination of these kinds of entities. It might seem like an industry is losing jobs or productivity, but it's not. I wonder how much of the loss in GDP in a recession is really just the elimination of this kind of bogus activity.

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