As we progress through the recession, many commentators are saying that recessions are a great time to start a business. To validate their argument, they point to some of the great companies that got their start during a recession, e.g.
- Netflix, 1997
- Airbnb, 2008
- Trader Joe’s, 1958
- Microsoft, 1975
- Sports Illustrated, 1954
- MTV, 1981
- GE, 1890
- IBM, 1896
- Warby Parker, 2010
- Revlon, 1932
- Disney, 1929
Many arguments are justifying why starting a business during a recession is a great time. A summary is:
- Surviving = Winning. During a recession, just surviving is hard. If you survive during such times with limited capital and profits, you will be well-positioned to survive during good times. Companies that survive during times of scarce resources are more efficient.
- Learning from Mistakes. We rarely learn from successes, only from failures. During a recession, things are harder, and there are chances there will be more setbacks. This environment will improve an organization’s problem-solving skills and agility.
- Builds a Tribe with Folklore. Surviving during times of great adversity builds excellent team cohesion. That is why groups have initiation rituals, to bond the members. Those hardships become the folklore of the organization, enabling it to share its culture with newcomers post-recession better.
- Considerable amount of available talent. In recessions, swelling unemployment provides a talent pool is brimming with great potential that one can get for lower prices than during good times.
- Get noticed. During good times, everyone is succeeding, so gaining attention is hard. However, in a recession, marketing and advertising fall, and success stories are rare. Thus it provides a chance to get noticed and get a leadership position.
- People are more interested in “Life-Saving Products.” During good times, selling a product or service that will save a few points of cost, or grow a few points or revenue is not always easy. Margins are good, and management is too distracted to pay attention. However, in a recession, things are tough, and management will look to any lifeline to survive. Thus if you can save costs or boost revenue, customers are more likely to buy.
- Investors Have Shut Up Shop. During a recession, finding VC or institutional capital is hard, so companies must fund expansion from their resources. As a result, they are more focused on generating cash and being resilient, which ensures survival. Those companies that cannot make money in good times, e.g., WeWork, will never survive in a downturn.
- Better able to capture gains when the market returns. Due to the focus on cash generation and resistance, when markets return, these organizations are well suited to achieve the growth and more ahead of others.
- War Time CEOs. As Ben Horowitz points out, at times like this, you are “War Time” CEO. Thus survival is paramount, and you cannot run out of cash. Therefore CEOs will be more thoughtful to avoid costly mistakes, e.g., such as bad hires, pursuing multiple, disparate markets simultaneously, crafting one-sided partnerships to gain media exposure, and making inefficient marketing commitments.
- Everything is on Sale. Not only talent, but everything is on sale. Rents are down, and used equipment is available. The costs of everything are low, enabling higher margins than competitors.
While all the above reasons make logical sense, and there are those companies that launched during recessions that emerge as market leaders, overall do companies that begin during recessions have a higher chance of survival than those that start during regular times?
I don’t know and cannot find research on the matter. However, I am often concerned with being given a single data point and told that it proves a point or trend. A classic example is that anyone can be the next Jeff Bezos, Mark Zuckerberg, or Bill Gates. Yes, anyone can be; however, the probability of someone being like them is incredibly small, probably less than one in a million.
- VC funding continues to hit all-time highs;
- Private Equity buyouts hit all-time highs;
- The availability of gig workers, SaaS products, and Cloud servers should increase the ease of starting companies; and
- over 300 colleges offer entrepreneurship courses
New corporate formation continues to fall and is below its level during the Carter Presidency. While the chart below only goes through 2011, the trends have not improved.
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