Why is an economic downturn a great time to start a business? Listen now!
Here are the highlights:
1. Planning is critical. Your business plan must chart the path for you over the next two years as you grow your business as the economy rebounds. Your plan should clearly show the market need you will be satisfying, identifying the competition (direct and indirect), and how you will execute to generate revenues and profit. The plan will also help you chart your capital needs as you grow through different stages of your business.
2. The cost to start or grow your business is lower. Because of other business failings, you can get office, manufacturing, and warehouse space cheaper. Also equipment from these other businesses may be available from a fire sale. Your supply of quality and affordable labor costs could be abundant as college grads enter the market with fresh skills and seasoned management our downsized that can help you execute. Critical services for an entrepreneur such as legal fees and accounting fees may be reduced as firms who have lost business from other companies’ failings, may be eager to negotiate their rates in order to get new business.
3. Capital is available. The sources may not be what you expect. The government in its economic stimulus package is pumping Billions of Dollars into the SBA loan program, Economic Development Grants, Research grants, and Micro-Loan programs. Many lenders report that they have money to loan, even for contract financing, but businesses are just not asking for it. Risk-Averse investors see this time as an opportune time to invest in early stage companies because the values of those companies are artificially suppressed so they can get more equity for the same amount of money, and with the upswing of the economy they can expect the company to grow and have an exit or get institutional funding at that time.
4. Markets will shift creating opportunities. As certain industries falter, new segments grow and sidebar industries are formed. Big competitors with large operating expense and debt burdens may fail, opening up new opportunities for the early stage competitor in that area to step in to service those customers and gain market share. The Green Industry is in its infancy compared to where it will go over the next few years as energy consumption behaviors change.
5. The Internet is the great equalizer. Entrepreneurs can find resources to accomplish all types of work from virtual assistants, web development, prototyping, SEO optimization, legal work, etc, at competitive rates because those same firms offering their services are more efficient. The Internet can also be used to validate your marketplace by attracting potential customers and creating an affinity group for your product.
Slow economic times act almost like an incubator for the business owner to concentrate on getting the basics of the business right before launch or to get processes in place to handle an expected increase in orders as the market rebounds. This includes having management and accounting systems in place, solid marketing materials and a well- designed website.
New business ideas are always welcome, providing they offer a break with the past, and have solid execution strategies. We only need to look at other recessionary periods to see that many dynamic new businesses are created in hard times. For example these businesses started and thrived in recessions:
– Disney 1924
– Hewlett-Packard – Great Depression
– Burger King Corp – 1954
– LexisNexis – 1973
– FedEx Corp – 1973
– MicroSoft Corp – 1975
– CNN – 1980
– Wikipedia – 2001
As Dave Saunders states in his blog entry on the same topic about jumping in to get your business started during a recession: Who would you rather be?
a.) the person who tried to do something new and started a new business, didn’t get it right and lost a bit of money in the process.
b.) the person who did nothing and stayed broke?
If you really don’t know how to start a business, recession or not, then the solution is simple.
Learn: Plug into any number of programs through the SBA or SBDC or local university to learn. Hire the expertise. Admit you don’t know something and seek out a mentor that does.
In conclusion, long-time McKinsey management consultant Matthew Brown put it best, “the people who made fortunes in the Great Depression had a different mindset. The Great Depression millionaires knew there was always money to be made. Prior to the fall they reduced their expenses and saved. When everything crashed, they knew people still needed to buy things; that money would still change hands. So they moved in. And it’s happening again now. True entrepreneurs like to zig when everyone else is zagging. They believe a recession is more a state of mind than an economic reality.” Brown continues; “As large businesses faced with high fixed costs try to reduce their variable costs, they reduce their activity, creating space for small businesses to move into the market. As the tide goes out the small guys can still swim but the big guys get beached. Recessions create opportunities for small businesses primarily because they operate with low overheads.” Brown concludes with “While many will suffer during this downturn, there will be others who make a tremendous amount of money. They have been positioning themselves all along to take advantage of this downturn.”