Hitting the Reset Button: The Silver Lining
When I was a kid, I was obsessed with the newly invented personal computer. In 1982, I used my paper route and Bar Mitzvah money to purchase an Apple II+ PC (my parents did subsidize the purchase somewhat, I confess). I was mesmerized by the magic of the personal computer and all its possibilities: games, programming, communications and more. But what I really fell in love with was this new, magical thing called the reset button. Don't like where you find yourself in the middle of Space Invaders? Hit the reset button. Frozen out in the midst of trying to log on to a bulletin board? Hit the reset button. Mad at your older sister for messing with your top score in Asteroids? Hit the reset button. This magical button represented a unique opportunity to erase the past and begin anew with a clean slate.
Twenty-seven years later, the theme of hitting the reset button has come back in spades. Moody's Economy.com projects 15 million homeowners are underwater – that is, their homes are worth less than what they owe on their mortgages. President Obama's latest piece of legislation in front of Congress is aimed at allowing these homeowners to hit the reset button with their lenders. Similar debt-control methods are being discussed to help corporations. Throughout VC-backed portfolios (i.e., small companies) and large companies, CEOs and CFOs are discussing with lenders how to renegotiate their debt and attempt to hit the reset button on a new set of terms in light of the current economic turmoil. In foreign affairs, a similar tone is being struck. A few weeks ago, Vice President Joe Biden declared it was "time to hit the reset button" in Washington's relationship with Russia and Iran, among others.
Will these efforts work? On the economic front, there are pernicious, cascading effects to these "resets." A rather depressing but insightful recent Merrill Lynch report, titled "Some Inconvenient Truths," suggests there is $6 trillion in private-sector (household and corporate) debt that needs to be eliminated before we can embark on a fresh credit cycle. To date, there has been "only" $1 trillion in write downs. The implication? We are nowhere close to hitting bottom, and hitting the reset button is a necessary but painful part of the process.
That's the macro picture. At the micro level, I am seeing people all over the place hitting the reset button as well. For many, the wealth trajectory they thought they were on is no longer feasible. The expectations they may have had for themselves or their children are being reexamined. Many are sitting down and revisiting all the assumptions they had made a year ago about their assets, retirement and job security. My portfolio companies are all questioning their old assumptions and making tough choices about how much to invest ahead of revenue and how many products and markets they can pursue in parallel.
But my rabbi made an interesting point to me this weekend. He pointed out that there is a silver lining in hitting the reset button. Rather than simply wallow in the bad news, people can view hitting the reset button as an opportunity rather than a burden. It allows them to let go of unrealistic expectations and focus on reality in a new way. It allows them to reset priorities, zoning in on what really matters to them and eliminating distractions. An economist's view of this sage rabbinical advice would be to observe that when your opportunity cost to pursue alternative paths has plummeted around you, anything is possible.
As a result of the opportunity for deep personal growth and new direction, hitting the reset button all around the world should mean more entrepreneurship everywhere. This trend appears to be playing out. I met with the co-head of Harvard's Entrepreneurship Forum last week, and she couldn't have been more excited to tell me about the burgeoning entrepreneurial culture that's emerged at Harvard. "The current economic environment has freed people up to do what they really want to do," she observed, "not just follow a certain path that they think they ought to follow." She reports that submissions to Harvard's business plan competition are double this year as compared with last year. Similarly, participation at the MIT $100k competition was stronger than ever.
Many economists are pointing to the parallels between our current recession and that of the one in 1982. That was the year I learned the magic benefits of the reset button. I hope others will as well.
Twenty-seven years later, the theme of hitting the reset button has come back in spades. Moody's Economy.com projects 15 million homeowners are underwater – that is, their homes are worth less than what they owe on their mortgages. President Obama's latest piece of legislation in front of Congress is aimed at allowing these homeowners to hit the reset button with their lenders. Similar debt-control methods are being discussed to help corporations. Throughout VC-backed portfolios (i.e., small companies) and large companies, CEOs and CFOs are discussing with lenders how to renegotiate their debt and attempt to hit the reset button on a new set of terms in light of the current economic turmoil. In foreign affairs, a similar tone is being struck. A few weeks ago, Vice President Joe Biden declared it was "time to hit the reset button" in Washington's relationship with Russia and Iran, among others.
Will these efforts work? On the economic front, there are pernicious, cascading effects to these "resets." A rather depressing but insightful recent Merrill Lynch report, titled "Some Inconvenient Truths," suggests there is $6 trillion in private-sector (household and corporate) debt that needs to be eliminated before we can embark on a fresh credit cycle. To date, there has been "only" $1 trillion in write downs. The implication? We are nowhere close to hitting bottom, and hitting the reset button is a necessary but painful part of the process.
That's the macro picture. At the micro level, I am seeing people all over the place hitting the reset button as well. For many, the wealth trajectory they thought they were on is no longer feasible. The expectations they may have had for themselves or their children are being reexamined. Many are sitting down and revisiting all the assumptions they had made a year ago about their assets, retirement and job security. My portfolio companies are all questioning their old assumptions and making tough choices about how much to invest ahead of revenue and how many products and markets they can pursue in parallel.
But my rabbi made an interesting point to me this weekend. He pointed out that there is a silver lining in hitting the reset button. Rather than simply wallow in the bad news, people can view hitting the reset button as an opportunity rather than a burden. It allows them to let go of unrealistic expectations and focus on reality in a new way. It allows them to reset priorities, zoning in on what really matters to them and eliminating distractions. An economist's view of this sage rabbinical advice would be to observe that when your opportunity cost to pursue alternative paths has plummeted around you, anything is possible.
As a result of the opportunity for deep personal growth and new direction, hitting the reset button all around the world should mean more entrepreneurship everywhere. This trend appears to be playing out. I met with the co-head of Harvard's Entrepreneurship Forum last week, and she couldn't have been more excited to tell me about the burgeoning entrepreneurial culture that's emerged at Harvard. "The current economic environment has freed people up to do what they really want to do," she observed, "not just follow a certain path that they think they ought to follow." She reports that submissions to Harvard's business plan competition are double this year as compared with last year. Similarly, participation at the MIT $100k competition was stronger than ever.
Many economists are pointing to the parallels between our current recession and that of the one in 1982. That was the year I learned the magic benefits of the reset button. I hope others will as well.