Is a recession really a good time to start a business? Consider this, General Motors launched in 1908 following “the Panic of 1907” financial crisis. Burger King began in 1953 amidst a recession, CNN in 1980, while Uber and Airbnb started during the financial crisis from 2007 to 2009.
In fact, a 2009 study by the Kauffman Foundation found that more than half of the Fortune 500 companies were started in a recession. Here are five factors that explain why recessions can be a good time to start a business.
More qualified employees are available
During a recession, companies are forced to part ways with many talented people who have large amounts of knowledge and expertise. Those individuals may either be looking for something quickly so that they can ensure financial continuity in paying bills and income (even if significantly less than they were making otherwise), or they get fed up with the corporate life and want to try something new, or something that is more fulfilling for them.
On the other side of that, if you are starting a business that requires entry-level staff, there are many great candidates who either cannot find jobs, have had letters rescinded, or can take more risks as a result of playing it safe and living with other family members or shared living arrangements. On both ends of the spectrum there ends up being more talent available and more willingness to try working for a relatively unknown company.
Space is available and cheap
As demand for office space and commercial properties goes down, so too does the cost per square foot. As companies shutter, or their owners decide it is a good time to retire, their spaces unexpectedly become available at a time where fewer people are looking for new spaces. This creates downward pressure on pricing, and can get you into a space for significantly less than you would have otherwise had to pay.
Less pushback from established businesses in the field
During normal times, a new business has to worry about the established players in the field that they are looking to disrupt. Often, if that new business makes too much noise too quickly, those established entities will use their networks and influence to make life significantly harder for that new competitor. Or, if they admire what that new company is doing, they may just take the idea and use their capital and larger teams to roll it out to the market faster. In times when the economy is down however, those businesses have to instead focus on putting out other fires that result from their size and reach. They are often too preoccupied with maintaining their pre-recession levels to spin out new ideas or take aggressive stances on new entries to their marketplace. Their distraction becomes smaller businesses’ window of opportunity.
Product market fit made easy
In the best of times, consumers may be more willing to try out new products and services whether it seems directly in line with what they want or need. In times of recession however, the consumer is much more likely to only go with the company offering the strongest value proposition that speaks to them directly. This means you get honest feedback that points out very quickly whether it will be a strong “yes”, strong “no”, or if you have potential if making some changes. It also tells you equally as fast, if you are better off moving on to a different product altogether.
The Lean methodology focuses on the elimination of overburden, inconsistency, and waste. Since having an inconsistent product, overstaffing or understaffing based on the project, and wasting product (or time) can often lead to the death of a startup, the scarcity of resources a recession brings, helps new businesses adopt a mindset that will serve them well the rest of their time building a business.
What’s the hangup? With all of these great advantages, you would think there would be many waves of businesses opening, and while there are certainly a lot of new openings, the numbers one would expect given the opportunities simply have not materialized.
The answer lies in the ability to access capital. Capital is the lifeblood of a new business, however, only a small fraction of new startup businesses are able to get venture capital funding – estimated at between 2-8%. During a recession those checks are often smaller for those who do receive them – the Center for American Entrepreneurship estimates they drop down to $25k-300k. Meanwhile, banks traditionally issue bank loans against factors new entrepreneurs do not have yet, like cash flow, revenue, customers, inventory, or a track record.
As you begin to think about starting your business, one great option is to finance that business with a Rollover for Business Startups. This allows you to take existing 401(k) or IRA funds and invest in a new 401(k) plan sponsored by your new C Corporation. Your new 401(k) plan then invests the funds into the C-Corporation stock, and the funds are deposited into the business bank account, ready to invest in the business.
This path not only diversifies your portfolio, but allows you to earn a salary as you need to be an employee of the business…something you cannot do with other retirement options. By investing in yourself, you can avoid the fees and interest associated with normal business funding, and give yourself the best opportunity for success.
For more information and to see how a ROBS plan can help you launch a business, please contact us anytime at www.accelefund.com or give us a call at 913.274.1930.