Start-ups seeking less skilled people find that a recession creates a recruiting bonanza. When Meakings of MFlex needs workers now, he calls Austin employers like 3M and Texas Instruments, which have had layoffs. "They have departments that will find employees for you," he marvels. "There's a big pool of good people."
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3. Bargains abound in capital equipment. The landscape is littered with the wreckage of companies going under. They are shedding everything from file folders to forklifts at fire-sale prices. Start-ups that buy smart can greatly reduce their equipment costs.
Seattle in 1981 was hardly the hot spot it is today, but Kevin Fortun, a restaurant manager, was convinced that eateries needed premium soup concentrates. He found a catering setup with a big kitchen and everything he needed: sinks, refrigerators, freezers -- the works.
"It was sitting empty, and the guy who owned it was really hurting," Fortun says. "I paid $30,000 for it and got $100,000 worth of equipment. I put down $5,000, with payments spread over three years and a balloon at the end. So I really got into this business for $5,000." Today Stockpot Soups does $10 million a year, selling on three continents.
In 1984, with Denver sliding into its worst recession ever, former aircraft engineer Jim Lynch decided to go into the tent business. Not the camping variety, but those colorful, logo-emblazoned, canopy-style numbers that corporations now set up at such festivals as the Super Bowl. A divorce had left Lynch with less than $10,000, not much for a manufacturing start-up, and lenders wouldn't touch him. "He had no money and a product without a proven market," recalls John Matthews, his would-be banker.
Determined, Lynch licensed his idea to Denver's M&M Specialties, a troubled manufacturer of exercise trampolines, and went to work there himself. When M&M failed -- Taiwan had radically undercut its prices -- it was banker Matthews who managed its liquidation. Lynch scraped together $12,000 -- half from an investor -- and went after the gear he'd need to open his own shop: industrial sewing machines, welding equipment, specialized drill presses.
"I got that stuff at 17¢ on the dollar," says Lynch, who now presides over KD Kanopy, a $3-million company. His operations chief, it's interesting to note, is none other than John Matthews.
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4. Suppliers, themselves hungry, will help. Keep in mind that in a recession, companies supplying start-ups are feeling the pinch themselves. With excess capacity, and anxious for sales, they are more flexible and aggressive in their pricing. By providing good terms and discounts, they extend a kind of supplier financing, cutting the cost of goods when new businesses most need a break.
In tough economic times, start-ups can forge strong relationships with suppliers. As with soldiers who have fought together, tight bonds are established that can contribute to a sense of commitment, even indebtedness, that continues into the recovery.
Before he joined the business faculty at James Madison University, Roger H. Ford started a restaurant and then a wine-and-spirits business, both in hard times. "With each company, I was able to get a terrific amount of trade credit," he says. "People were eager to sell and extend credit even though we had no track record. During a recession everybody else wants to make deals, too."
Indeed. At Exos, Beth Marcus has seen vendors "bend over backward" to make sales. "Our electrical engineer had every major vendor of oscilloscopes here inside his first week," she says. "They were falling all over each other. All we were buying was one scope for about $3,000, and a reconditioned unit at that." It's been the same with copiers and fax machines. "If the economy were booming, salespeople just wouldn't be in here, because we don't buy much. But now vendors pay more attention to us than they would otherwise for such a small client."
They also were willing to help the company maneuver through some tricky financial shoals last summer. With a few key orders delayed, Exos suffered a near-fatal cash-flow crunch. "We told the vendors -- and we have more than 100 -- what was going on," Marcus says. "We said that if they stuck with us, we'd be friends forever. They understood and really helped us through that period."
Don't rule out price breaks from professionals, either. Pat Ludwick and two partners launched Auto Critic in 1989 in Austin. Their idea was simple -- start a company that would do for used-car buyers what home inspectors do for home buyers. For $69, a mechanic would travel to the purchase site and perform a 90-point analysis, accompany the buyer on a test drive, and then write an unbiased report on the car's condition.
"No one wants to buy a lemon," says Ludwick, who was convinced he had a big hit on his hands, maybe even a national business. He was soon proved correct. Auto Critic went profitable in its fourth month, and before long Ludwick found himself franchising -- which meant legal work. With Austin's economy a disaster, there were lawyers on every corner with their hands out.
Not long before, they had charged $150 an hour. But Ludwick got lawyers to draft his franchise documentation for $35 an hour. "They really came down off their high horse," he says. "It was the same thing with printers, advertising, designers, artists. I had people throwing competitive rates at me left and right."
At Growing Healthy Inc., a frozen-baby-food start-up near Minneapolis, founder Julia Knight discovered that big vendors were particularly willing to help her in tight times. She was able to lease a $10,000 phone system from AT&T, for instance, avoiding an outright purchase. And accountants at Price Waterhouse agreed to delay their billings.
"They knew that if we failed to raise money, they would not get paid, but they were able to do that sort of thing," she says. "We went with the big guys because small companies are less likely to take a flier on a start-up. Our package-design firm is one of the largest in the country, and it worked out the same sort of deal. All of our suppliers did."
