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BUSINESS PLANS

Is Now a Good Time to Start Up?

Data doesn't support the commonly-held notion that a recession is a good time to start a business.
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According to a preliminary study released by the Kauffman Foundation, the jury's still out on whether a recession is a good time to start a business.

According to popular theory, recessions breed entrepreneurship because there's less to lose; if you lose your job, starting your own company is a good way to get one.

On the other hand, a recession results in limited availability of risk capital, and unwillingness to sell products and services in a weak economy.

According to Paul Kedrosky, senior fellow at the Kauffman Foundation and author of the study, an added complication to this conundrum is a lack of quality research on the extremely complex issue.

"There hasn't been much research on the subject, and the data is crap," Kedrosky explains. "It's hard to do well, so people don't bother."

Kedrosky refers to the theory that recessions breed entrepreneurship as a "fairy tale people like to tell each other," but also emphasizes that that doesn't mean a new business can't thrive in an economic downturn.

"Entrepreneurship is about innovation, but it's also about scarcity," he explains. "And there's no better way to weed out the wimps than with a depression or recession."

According to the study, which analyzes the number of companies that went public per year across every expansionary and recessionary period from 1900 to 2006, it's difficult to tell whether downturns spark the entrepreneurial spirit; the data doesn't show when those companies were actually founded.

"The implication is that companies founded in such times have a higher likelihood of turning out to be economically important," Kedrosky says in his study. He immediately goes on to say, however, that "there is much more work that could be done."

Despite the ambiguity, Kedrosky says that the current recession is not necessarily bad news for entrepreneurs. "I'm expecting we'll see some of the most interesting companies of the next ten years emerge now—especially in the automobile, finance, and media industries," he says.

Last updated: Apr 30, 2009




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