Thursday, June 11, 2009

Thinking about Being an Entrepreneur? Economic Downturns Can Be a Good Time to Start a Business

According to a June 11, 2009 article in Real Clear Politics by Brandon Ott, now might be a good time to start your own company:
In the middle of a long and bruising recession, perhaps the worst since the Great Depression, starting a new business might not be a bad idea. As counterintuitive as it might seem, successful entrepreneurship in an economic downturn has produced some of the world's most famous companies-IBM, General Motors, Microsoft and FedEx, to name a few. Will this recession prove to be another launching pad from which highly renowned and innovative companies emerge? One can only speculate, but given new research, we might see the top companies of 2020 or 2030 begun in the recession of 2007-2009.

According to a new study by the Ewing Marion Kauffman Foundation, more than half of the companies on the 2009 Fortune 500 list and just under half of Inc. magazine's list of America's fastest-growing companies began during a recession or a bear market.

"You can see the story of the American economy in these numbers," said Carl Schramm, president and CEO of the Kauffman Foundation. "History has demonstrated this time and again: new firms create new jobs and fuel our economy. Policies that support entrepreneurship support recovery."

Recessions are a time of both death and renewal--the so-called "creative destruction" of Joseph Schumpeter. Though we might expect downturns to negatively affect entrepreneurial activity through a lack of available financing and the overall dampening of "animal spirits," there are also reasons to expect recessions and bear markets to be auspicious periods for new business formation.

Rising unemployment can create a pool of highly-skilled, highly-trained workers ready to enter a new field either by starting their own business or becoming employees of a start-up. Financing constraints, common in a downturn, may not impede a firm's birth, but may hinder its growth in the future. Contractions are also likely to weaken competitors, thus making entry easier into a market for a new company.

That's good news for the economy. According to the Kauffman study, job creation of start-up companies is less volatile and sensitive to bad economic times than established companies, which are unlikely to add many jobs despite the economic environment. For example, absent new businesses, the economy as a whole would have added jobs in only one year during the 1990s. Employment created by nascent enterprise, therefore, is vital in sustaining an economy's strength.

Similarly, new business creation seems little affected by recessions and bear markets. In fact, the study says that entrepreneurs' motivation in starting a new company can be a way "to beat unemployment" by taking "the future into their own hands."

Even in this bear market, there are likely to be 400,000 to 700,000 startups in both 2008 and 2009. Since 2001, the average
size of a new firm is 4 employees. When combined, these numbers provide a positive impact on employment that otherwise would be lacking.

In addition to job creation, new businesses also help the economy in a variety of ways. They account for the commercialization of new innovation, often are more productive and flexible than their older peers and have positive effects on already established companies and industries.

As the Kauffman analysis concludes, it is promising to see that even in a depressed economic situation, entrepreneurs are starting businesses and not relying on others to provide for them.

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