VideoAmerican economic history brims with big-name companies that can trace their beginnings to a recession. Coors was founded during the recession of 1873. Bill Hewlett and Dave Packard cobbled together the prototypical garage start-up at the end of the Great Depression. Bill Gates, undeterred by stagflation, founded Microsoft in 1975. According to a recent report by the Ewing Marion Kauffman Foundation, an organization devoted to the study and promotion of entrepreneurship, more than half of the companies on the 2009 Fortune 500 list were founded during a recession or bear market, as were nearly half of the businesses on the 2008 Inc. 500 list of the fastest-growing companies in the United States.
While an economic downturn may seem an inauspicious moment to start a company, several factors often combine to produce opportunity. "The best time to start a business is when it's hard to start a business," says William Sahlman, a professor at Harvard Business School. In a recession, competition lessens as established companies struggle and fold, leaving room for new entrants. "You can make more progress during such periods and build a stronger position, without being competed to death by well-funded competitors," says Sahlman. Rents tend to be lower, and high-quality talent is plentiful.
In addition, so-called opportunity entrepreneurs — people who have a new idea and try to capitalize on it — are joined by "necessity" entrepreneurs, says Dennis Ceru, an adjunct professor at Babson College. Finding themselves unemployed, some people who harbored an entrepreneurial dream but feared leaving the security of a full-time job may join with other laid-off workers who simply need to generate income.
But as would-be entrepreneurs face the Great Recession of 2008–2009, are the odds too heavily stacked against them? The credit and capital markets are at the epicenter of this downturn, limiting access to capital even for larger companies. Will great ideas remain just that, rather than blossoming into great companies? Or will those who would be kingpins simply have to be more creative and resourceful than before?
Dialing for Dollars
By all accounts, raising funds for a new business today is harder than it has been in decades. "There are no bank loans right now," says Louis Katz, a partner with law firm Ruberto, Israel & Weiner and a former CPA who works with small and midsize businesses. "The SBA is starting to free up some money for new businesses, but that's about the only place you see it. Private-equity firms are shoring up their existing companies rather than going out to find new businesses to finance."
Sahlman agrees that "anything that requires bank financing is problematic," but adds that he's seen increased availability of equity capital in recent months. "It would be hard to start a $100 million project today, but there are lots of people funding things on the Web where it costs $250,000 to figure out if an idea is going to work, and if it works, it might be the next Facebook," he says.
Lack of capital is nothing new for entrepreneurs, more than 90% of whom never receive a dime from angel investors or venture-capital firms even in the best of times. Gregg Fairbrothers, founder of the Dartmouth Entrepreneurial Network and an adjunct professor at the Tuck School of Business at Dartmouth, says, "At the very seed stage of a business, there's no money at good times or bad times. Most small companies just are not going to get money from banks or investors at any time."
Instead, they turn to sources of capital affectionately known in start-up circles as the "three F's": friends, family, and fools. But in the wake of the stock market's plunge, wealthy relatives and successful college roommates may be more cautious than in the past.
While angel investors have also watched their net worth decline, Fairbrothers says a surprising amount of angel money continues to flow to start-ups. "We've closed as many seed fundings in the past 12 months as in any period I can remember," he says.
One explanation may be that many investors are unsure about where to put their money, and have found that more-traditional investments — in, say, mutual funds — were riskier than they thought. They may be more comfortable investing directly in a company, where at least they can feel some sense of connection with the management team. Plus, "for people who do have money, this is the best time to invest because valuations are lower," says Fairbrothers.
Dave O'Brien, a former CFO who is now chief executive of Business Catapult, a software and services firm that helps create and manage online communities of entrepreneurs and investors, says investors are more selective than they have been in the past. They are also trying to limit their risk as much as they can. "I see more people interested in investing one stage later than they used to," he says. "Someone who in the past might have funded a concept at a prerevenue company is now looking instead at a company with revenue that needs capital to grow."
America's Got Talent
While money is tighter than in recessions of the recent past, another economic condition could offset that constraint: namely, unemployment. By August, about 7.4 million people had lost their jobs since the beginning of the recession, yielding an unemployment rate of nearly 10% nationally and into double digits in many spots. The average length of unemployment has grown to more than six months, the longest period of time since the government began tracking the data in 1948. Such lengthy stretches leave workers with plenty of time to hone business plans — and indicate a dearth of other options.
Reader Comments» Post a comment