Is This the Time to Start a Business?

Is This the Time to Start a Business?

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.

I hope that companies started during such times do survive, and many people will actively start companies; we need them! Unfortunately, while:
  • 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.

Recent Posts

Do you know your Profit per X to drive dramatic growth?

Do you know your Profit per X to drive dramatic growth?

I recently facilitated a workshop with several CEOs where we worked on the dramatic business growth model components. One of the questions that I had asked them beforehand was, "What is Your Profit/X?" The results showed that there this concept is not clear to many....

Five Ways to Attract Prospective Employees

Five Ways to Attract Prospective Employees

There is a war for talent. How do you attract talent to your company and have them apply for jobs there? You have to show why they should consider you, who you want, what you offer, and how your current employees feel.

Are you killing your firm’s WFH productivity?

Are you killing your firm’s WFH productivity?

Productivity remained during WFH with COVID. However, further analysis found that hourly productivity fell and was compensated for by employees working more hours. What was the culprit – Meetings. Want to increase productivity, have fewer meetings.

EOS is just that, an Operating System

EOS is just that, an Operating System

For those of you who are not aware of EOS, it is the Entrepreneurial Operating System. It seeks to improve businesses by getting six components aligned to enhance business operations. The six are: the vision the people the issues traction - meetings and goals...

What has COVID done to Company Culture?

What has COVID done to Company Culture?

COVID has affected everyone. However, companies need to examine if they have lived their core values during COVID, how they are reinforcing them in a WFH environment, and especially with the onboarding of new hires.

Profit ≠ Cash Flow

Profit ≠ Cash Flow

Knowing how much cash you generate is essential for planning for growth. Too many companies don’t know and when they grow they find they are continually running out of cash. Understand your cash flow generation and how to improve it through improvements in your Cash Conversion Cycle and using the Power of One.

What Are Your Critical and Counter Critical Numbers?

What Are Your Critical and Counter Critical Numbers?

The key to achieving long term goals is to define short term goals that lead you there. Focusing those short term goals around a key metric is essential. However, ensure that the metric will not lead other areas astray by having an appropriate counter critical metric act as a counter balance.

Do You Truly Know Your Core Customer?

Do You Truly Know Your Core Customer?

Knowing the profit of your core customers is key to building a growth model. Many companies have identified core customers that are generating a sub-optimal profit and so they cannot realize the profits they seek. Identifying the correct core customer allows you to generate profits and often operate in “Blue Ocean.”

The Greatest Own Goal or the Greatest Collapse

The Greatest Own Goal or the Greatest Collapse

The European Super League collapsed within days of launch due to hubris and the founder forgetting the key parts of their business model, value creation, sales, and value delivery. The collapse might bring a high price.