Five good reasons to launch your startup in today's economy (and two reasons to think twice).
by Reed Richardson.
In a still fragile business climate marked by stubbornly high foreclosure rates, uneven consumer demand, and tight credit markets, budding entrepreneurs might consider right now to be one of the worst times to start a new business. But launching a startup in the midst of ongoing economic struggles can actually be a roadmap to long-term success.
According to studies by the Kauffman Foundation and the outplacement firm Challenger, Gray & Christmas, the rate of entrepreneurial activity rose significantly between 2007 and 2009. But since the start of this year, the Challenger Job Market Index has found that the pace of new startups has cooled considerably, falling to 3.4 percent in the second quarter of 2010 from 9.6 percent in the last quarter of 2009. Clearly, the earlier statistics show that many people believed there were opportunities to be seized in a struggling economy, but perhaps a fear that it's now too late to take advantage of them has scared off some more recent entrepreneurs.
If you're among the latter, however, take heart; there are still many sound reasons for starting your small business today. Below are five arguments for jumping into the business waters right now.
1. Lower threshold to entry
Entrepreneurs don't need as much capital to launch right now because resource and overhead costs are at or near historic lows in nearly every category. For example, the commercial real estate market continues to suffer from high vacancy rates, so the rent or lease payments on, say, a new retail business's storefront location, might be had for a fraction of the price commanded just a few years ago. Similar gluts in durable goods and office equipment inventories likewise mean that everything from a manufacturer's source for its raw materials to a law firm's need for photocopiers and workstations can be found at pennies on the dollar.
Seth Levine, a managing director at the Boulder, Colorado-based venture capital firm Foundry Group, says that launching a business in this type of low-cost climate impresses upon entrepreneurs the critical importance of leveraging your startup's cash flow as far as it can go. "I think they get a practical advantage from having started their companies in an environment that often requires a certain amount of stinginess, which often serves companies well throughout their lives," Levine explains. "I think businesses have a tendency at all levels to spend too much. There's nothing like a really tight market to make you look more closely at every dollar going out the door."
2. Talent is cheap and available
Another critical small business resource that can be ripe for the picking in today's economy is people. With the Labor Department reporting unemployment rates near double digits and more than five candidates per job opening, now is definitely an employer's market. What's more, the deep and widespread nature of the financial crisis has left many workers, even those still employed at large corporations, uneasy about the future and suddenly more willing to entertain a lower-salary offer from a startup.
"People are finally realizing that we are all self-employed, regardless of our work configuration," explains Pamela Slim, who authored the book Escape from Cubicle Nation and writes about the topic on a blog of the same name. "In my experience as a start-up coach, I have seen a significantly larger number of corporate employees working on a ‘side hustle,' (a small business which provides supplemental income), which can act as insurance in case of a layoff, or as the early testing stage of a full-scale business." In addition, Levine points out that the significant decline-or complete dissolution, in some cases-of many employees' 401(k)s and stock portfolios makes it even easier now to recruit from the ranks of the currently employed for a startup business.
3. Taking a risk isn't so risky
Many a successful business can trace its roots back to a particularly ignominious period in the American economy-16 of the 30 companies in the Dow Jones Industrial Average, including household names like McDonalds, General Electric, and Procter & Gamble, began during a recession or depression. For millions of Americans who have lost their jobs in the past two-plus years, being laid off became the unexpected impetus that sparked their entrepreneurial passions and, just maybe, will lead them to similarly out-sized success. And there's good reason to adopt this ‘never look back' attitude, according to Indiana University business professor David Audretsch.
"People understand that there's something different about this recession," Audretsch explains. "In the past, being laid off might have been a temporary situation, until the inevitable recovery comes. But now people are finding that many of those old jobs were not sustainable. Those jobs have disappeared for good and so they can't count on going back to the same old company and picking up where they left off." Besides, adds Audretsch, a clever business idea is still clever in a boom or a bust cycle. "Real serious entrepreneurs don't pay much attention to the business cycle."
4. Your established competition may be already weakened (or gone)
It's human nature to want to preserve what you already have, and the same phenomenon often occurs within the business world as well. That's why, in tough times, many established companies retrench, pull back advertising, and focus on keeping their current customers instead of pursuing new ones. This pullback strategy sometimes backfires completely, sending a struggling company tumbling into bankruptcy and clearing the field for a startup, or, more often, creating a market vacuum that a new small business can fill and exploit.
Moreover, new startups aren't constrained by past performance, existing infrastructure, and future expectations the way large companies often are. Instead, they are free to experiment with new products and innovative solutions, which can take more conventional businesses by surprise. Some examples of this, startup coach Slim explains, involve early-stage financing and social media marketing. "If you can't get access to credit from mainstream institutions, you have to find a way to get money directly from consumers, without spending too much on materials or infrastructure. This phenomenon is creating highly functional and streamlined business models," she notes. Likewise, she adds, "the dramatic increase in social media users also means that you can expand your market far beyond your own geography."
5. Nowhere to go but up
A small business that makes use of a slow economy as a trial period-to perfect their product or fine-tune their marketing-may be in a significantly stronger position once good times return. "The business cycle has been with us as long as anyone can remember," points out Prof. Audretsch. "When the full recovery does arrive, you want your small business to be positioned to take maximum advantage of it, instead of just moving in, hiring, and starting to set up shop."
In addition, Slim notes that small businesses that survive tough times often gain something of a psychological advantage, one that, she says, can carry over to customers as well. "Consumers are looking for confident market leaders who can help pull us all out of the economic spiral," she explains. "When they see businesses starting and growing in one of the most challenging markets in generations, that instills deep trust. Those businesses who already have trust will be well positioned for growth when things do pick up. And they will."
Despite the aforementioned reasons in the affirmative, a fair-minded assessment must also acknowledge that there are some obvious drawbacks to starting a small business right now. Here are two significant obstacles that budding entrepreneurs should prepare for before hanging out their shingles.
1. Hard to raise money
Capital is the fuel that propels the engine of business and there's no denying that, right now, much of the economy is still sputtering along on fumes. Credit markets remain constricted, meaning that your startup may have to take a more modest, measured approach rather than rolling out a million-dollar product development and marketing campaign simultaneously. To combat this, many small business owners are embracing a spartan startup mentality known as bootstrapping, but this approach won't necessarily work for every kind of business. As a result, an undercapitalized startup could easily stall out prematurely and fail or be quickly poached by a better-financed competitor, even if it is selling a fantastic new product or the next killer app.
2. Getting lost in the crowd
As the Kauffman Foundation survey found, millions of Americans have decided to strike out on their own and start a new business in the past few years. For many, this moment is the culmination of years of preparation and planning, but for some, launching a startup may simply be a matter of joining in what appears to be the latest fad. "There is a such a thing as an entrepreneurial bubble," notes Indiana Univ. Prof. Audretsch. "If everyone you know is starting a business, a kind of herd mentality sets in."
Pamela Slim agrees. "I have noticed a lot more people trying out business ideas, or launching a small business after being laid off, instead of looking for another job.
Just like you can never guarantee a corporate job will last forever, you cannot guarantee a new business will be successful," she points out. This surge of entrepreneurship will undoubtedly help drive innovation forward, she explains, but, inevitably, it will also leave lots of failed small businesses in its wake. But even in those cases, Slim sees a silver lining. "The way you gain insight and experience as an entrepreneur is by trying a lot of things, failing often, learning, and trying again," she explains. "There is no perfect time to launch, so why wait? Get out there and see if your great idea holds water in the real world."