Seven reasons why a recession is the best time to start a business.
From hungry suppliers to committed employees, seven reasons why a recession is the best time to start a business (or to grow the one you already have)
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Start a company in a recession? It sounds like a crackpot idea. But just for the record, a recession is a great time to launch a business.
Honest.
We don't mean it's an easy time to start up; no time is. Nor would we argue that just any business will fly in a downturn. Some don't have the characteristics needed to best exploit a stumbling economy. (See "A Recession-Opportunity Checklist," page 5). Others, thanks to tougher-than-usual scrutiny by the financial community, never collect the capital to get off the ground.
But if the early-stage hurdles are bigger, so are the benefits of clearing them. The rates at which new companies are started may be lower during recessions, but start-up success rates are higher.
Why? Some of the reasons are predictable. Key business resources are cheaper, so the typically resource-poor start-up can execute its business plan for, say, 60¢ on the dollar. Or, better, a recession start-up can go ahead and spend the dollar and in return get resources -- such as talent or prime real estate -- that wouldn't have been available at any price during a boom. The result: a better company than could have been hoped for in normal times.
What's more, the very pressures that make an economic contraction tough -- the rigor applied by financiers, the discrimination exercised by buyers -- force new companies to be smarter and to learn ways of operating that will make them stronger over the long haul. It's no wonder that recession start-ups are more likely to survive; a recession is a splendid -- if exacting -- teacher. It forces founders to be better businesspeople.
Or so we've learned in interviews with dozens of company builders who launched businesses under fire. Some started in 1981 and 1982, during the worst recession since World War II. Some founders plunged in when their regional economies were savaged -- in Denver, say, in 1984. Others are starting even now.
Not a single one regrets the timing. Instead, the founders claim, for a new business a downturn creates advantages not found in a robust economy. As their stories suggest, of all the circumstances under which to start a company, a recession is the best. Here's why:
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1. Real estate is cheap. A recession forces down the cost of commercial real estate, and the building binge of recent years has magnified that effect, leaving the largest glut of vacant commercial space in U.S. history. Landlords, anxious to deal, are offering free rent for up to a year and boosting allowances for such interior-design work as office build-outs and carpeting.
Even in Wisconsin, where the economy is relatively strong, entrepreneurs are finding generous terms. Consider the case of Bob Young. A medical-products marketing specialist, he spotted a technology that a former employer was tardy in bringing to market -- a device that monitors blood-gas values in hospital patients by means of a sensor, eliminating the need to extract blood to measure oxygen levels.
Young knew he could produce a state-of-the-art version of the device, and late last year he founded Sensor Devices, in Waukesha, Wis. A company there was failing, and Young secured 3,000 square feet of warehouse space and 2,100 square feet of office space to house his five employees. "We sublease it," he says -- $4.25 a square foot for the warehouse and $7.50 a square foot for the offices. He's almost embarrassed by his good fortune.
But in this buyer's market, start-ups can aim for more than just low prices. With many landlords desperate, founders can demand shorter leases, even month-to-month ones -- reducing the risk inherent in long-term commitments. What's more, downturns make better locations available, which will help greatly in the long run.
English immigrant Barry Meakings, for instance, started his company, MFlex Inc., in Dallas. MFlex takes waste rubber -- tires, car mats, shoe soles -- and grinds it into a granular substance. When mixed with a resin, it pours like concrete to make nonslip surfaces for pool decks, jogging tracks, and the like. In 1989, with his company growing, Meakings needed a larger building and access to a major highway to facilitate his trucking.
"Austin was about two years behind everybody else," he says, "We wanted to get in there before it started picking up." He found a 22,000-square-foot plant north of the city -- and just off an interstate. The building had originally cost $1.3 million, but Austin was so depressed Meakings was able to buy it for $420,000.
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2. Talent is available and affordable. Obviously, more people are looking for work in a recession, and as a rule they are less choosy about the salaries they find. Moreover, happy to have a job, employees are more reliable and more committed. There is less absenteeism and job hopping. In short, employees are lower-maintenance. Most start-ups face a mountain of challenges, and when a founder can worry less about the work force, it frees time and energy to focus on other pressing business problems. Also, with salaries and benefits flexible, compensation packages can be tailored to control up-front costs.
In January 1989, just as the "Massachusetts Miracle" was flaming out, Beth Marcus launched her company, Exos Inc., on the outskirts of Boston. With a doctorate in biomechanics and two engineering degrees from the Massachusetts Institute of Technology, she had left Arthur D. Little with the licensing rights for a measurement technology she had helped the consulting firm develop.
Marcus was convinced that she could use the technology to build a robotics device that had commercial potential, particularly in medical applications. Last January, after advertising in the newspaper for a mechanical engineer, she culled 12 qualified people from the more than 200 who applied.
Marcus found them more willing than before to consider equity as part of a compensation package. "Equity means more to them," she says. "The people I interviewed were saying, 'I realize I'm highly paid, but I'm really looking for a job where I can enjoy myself and contribute.' You wouldn't have heard that five years ago. They would have wanted all that and, by the way, a $10,000 increase, too."
Bob Young, the Sensor Devices president and CEO, was able to recruit a certain electro-optical engineer who was with a floundering company, something he might have been unable to do in better times. "Few companies in this industry have an electro-optical engineer as a project manager," says Young.
