A recession is looming -- or may already be here, depending on who you ask. Either way, the U.S. economy is undeniably experiencing a significant downturn. And with the financial crunch that accompanies hard economic times comes doubt about decisions regarding money – including doubts about whether or not to start a company.
A recession is generally a difficult time for companies that are trying to raise venture capital because VCs are less likely to fund companies when the economy is suffering. For this reason, a recession is not an ideal time to start a company that requires a lot of start-up capital to get off the ground.
But small Internet and technology-based companies are another story. A recession is actually a great time to nurture and incubate a small company. Here are five reasons why:
1) A recession forces founders to be frugal. Starting a company without a lot of money is an excellent discipline for entrepreneurs and for every early-stage company. While it may feel painful to track every dime, the lessons that frugality teaches are invaluable. Having limited capital leads to creative thinking, healthy deliberation about expenditures, and the need for founders to pay very close attention to cash flow, budgets and balance sheets.
2) Recessions force entrepreneurs to take another close look at their ideas. Incubating a business that is based on a flawed idea won't work. A great start-up team or a lot of money can lend the appearance of success, but in the long run, a business built on a bad idea will end up standing on shaky legs. During a severe economic downturn, entrepreneurs will be sure to look long and hard at their business ideas before jumping in. A recession will force questions like:
- Will there be a market for this product if customers are cutting back?
- Do I have the capital to get this off the ground without raising VC money?
- Will the product or service benefit users in both good and bad economic times?
These types of questions will force business owners to refine their thinking -- and will leave them with more solid ideas and plans.
3) Recessions lead to committed startup teams. A common perception about recessions is that jobs are put in jeopardy. This may not be true, but if people feel nervous about their job security, they probably will not want to leave a comfortable situation -- especially for a start-up. But the flip side of this is that anyone who does come to work for a startup will be incredibly committed. A founder will have employees who really believe in his or her vision and products, and/or who love the start-up environment so much that they're willing to live with the added risk and Spartan conditions. Those are the types of people entrepreneurs need for their teams.
4) Startups get a head start. Let's say you have a great idea and you know that you're going to start a company, but you're wondering about the timing. What should you do? The answer is: Start now. This will give you a lead over the competition, and will be well worth any extra struggle. When the economy comes out of recession, your business will be that much further along, and that much closer to being ready to raise capital (which will once again be available, with VC firms eager to invest after sitting on their cash during the down years). You can get a great head start on that day by starting your business now.
Comments
Hi Melissa,
I really liked your 4th point about starting a company during recession times. That is a very good reason. you get the early head start plus VC then are eager to finance as you can provide them with some track record to show for.
Adam
Hi,
Great points, Melissa. Perhaps a recession makes other businesses afraid to move forward with their strategies. This may be an advantage for a start-up that can move fast. However, I think a recession is also a good time to really focus on a specific customer. Maybe this is an opportunity to target a customer group that is somewhat shielded from the recessionary hit. Additionally, in a recession the economy tends to lose jobs, which can mean that saavy entrepreneurs might be able to snatch-up some talent looking for a home.
Thanks,
Joe
Joe,
Thanks for your really good suggestion - targeting in on a specific customer that isn't hit as hard by the recession is a great opportunity. Because, of course, that customer wouldn't have been obvious at any other time except during the recession. Great point. - Melissa
Hello from China,
the US economic downturn has spread to every corner of the globe, China has seen the great slides from the highest almost near 6,000 to 3,700 calculated on this day in the capital market. which gives the investors a more pale prospect for further financing and raising capitals.
yet the consumption environment has not been completely or as seen in the stock market damped, crowds of people still in great demand for goods purchase.
personally I have heard of starting a company purposed for future strategy, however, the fields that you picked is of crucial entry for profitability, and China has already gone through the bubble that seen the boosting-up of internet and techonology-based industry, and China is now balancing the economy and cooling down which is originated from the purposed mind, get the max consumption from the inside and cuf back on the export are the main leverage tools the China government is doing.
Email: bianchinni@163. com
hope to hear more from who seen this post and love to reply back on more China economy.
Hi Melissa,
A very good post though I don't think that all VC's will shy away from funding start ups during a recession. The best VC's would concur with all of the points you and others have raised and also know that some of the best companies have been started during a downtown in the economy...MS and Cisco to name a couple. In addition, as technology continues to evolve the cost of building key components of a business has also declined and the time to market is generally shorter compared to 5 or 10 years ago.
i love to start now but i dont know how to go about it. can you help me
Thank you so much for your article. I think it is inspiring and right on track with what I was thinking. My business started in September and ever since then, the media has made me feel like I was wrong to get into this now, even when I have felt all along it was definitely the right time to start. I still have no regrets, but just use great caution when making buying decisions. I wish the best of luck to anyone out there who is thinking of starting up a business, now.
Thanks,
Jennifer Higgins
Metamorphosis
That's very true...but if I want to start a new business, how can I decide for which business I should go for. What may be the parameters to decide that. At each and every place people try to save money these days. So we have to find out the place where people have to go anyhow. Moreover, I would like to know which may be the best deal at this critical time. The business which can survive and also have a great future when the end of recession stars.
Thanks,
Rajeev