10 Reasons The Best Time To Start A Business Is During A Downturn Jul 24th 2013, 09:38
By Alec Lynch
Recessions are hard times. People lose their jobs, companies get wound up, and the lucky ones take the losses from their cash reserves. While the U.S. may not technically be in a recession right now, there's still plenty of uncertainty and talk about dark clouds on the horizon.
But it's not all bleak. Startups, with their inherent agility, can take advantage of a weaker economy and come out on top. From day one startups operate an inherently lean business model, while maximizing value for customers. While economic uncertainty is never a desirable situation, some of the world's greatest businesses have started during a downturn or recession. Importantly, many reports suggest startups are some of America's greatest employers, as they scale to become big companies in their own right. Just take a look at the number of employees at Google Google, Apple Apple, Facebook Facebook, HP, and others.
Here are 10 reasons it's worth starting a business during a downturn.
1. People want innovation
Recessions create problems. They also slow investment in innovation down. Consumers and businesses are looking for solutions to problems which presents opportunities for startups to solve.
2. People want to save money
As a nimble startup with few expenses, you should be able to undercut your competitors. Their clients will be watching their wallets and looking for cheaper alternatives, so it's the perfect time to make a sales pitch to win them over. Do a good job, and you'll keep those clients when the economy recovers.
3. Incumbents are vulnerable
Whether they're giant corporates looking to scale back and hibernate through the downturn, or smaller companies that might not have the resilience to see out the storm, your competition is in a vulnerable state. Startups are agile and flexible, and as long as you can support yourself with your minimal overheads, it'll be hard for the economy to chew you up and spit you out.
4. Good people are looking for work
If you're able to secure funding, or grow your business rapidly, you'll probably be looking to increase your headcount. But finding the right staff is really, really hard. In a downturn, when layoffs are rife, highly qualified, talented and effective individuals can be found much more easily than during the good times.
5. Things are cheaper
Weak economic growth means ailing businesses are selling off certain assets. Put more simply, things cost less. Your typical overhead costs such as office space, or one-off purchases such as office furniture, tend to have lower base prices, and vendors are more likely to discount prices to move stock quicker. Even the good people you find in point number three come cheaper, demanding a lower salary and less benefits than they might in a strong economy.
6. Lower interest rates, mean cheaper credit
Not only do things cost less, the central banks of affected countries generally start to drop interest rates to keep consumer spending high. This means that loans and particularly credit cards may make more sense for your business in its early days, compared to the high interest rates used to control inflation when the market is strong. I was able to start DesignCrowd.com off the back of a credit card.
7. You will have less competitors
When the economy is strong, every man and his dog wants to startup. Many of these budding entrepreneurs go straight for funding and eventually squash the bootstrappers. There are less people trying to startup in a downturn because there's less funding about. This makes it easier for those who are keen bootstrappers — those who want to control ownership in the company, and don't have to split the pie with bankrollers.
8. Smart investors want to invest
But if you need funding — perhaps there's plant and equipment costs that can't be avoided — there's still plenty of determined investors who are looking for new business opportunities. When the economy falters, angel investors in particular, look to move their money out of the stock market and may be willing to fund you if your prospects are promising.
9. Downturns give startups negotiating power
Traditional vendors have trouble moving product when the economy is weak. If your company depends on products from suppliers, a downturn is a great time to negotiate or renegotiate a deal that will benefit you even after the downturn ends. When the economy is strong, a startup is just another startup, and the vendor sets the rules.
10. You'll build a lean startup with good habits
A startup built during the tough times is designed from the ground up to be a lean, mean, efficiency machine – whether you've bootstrapped or not. These habits should stay with you when the market recovers, giving you higher profit margins since you'll be able to lift prices once consumers and clients are spending again. If you can build and grow a business when consumer confidence is down and businesses are tightening their belts, your business will be bullet-proof when things improve.
There are plenty of reasons to start a business during a downturn, and plenty of business models that are considered recession-proof. If you've got the tenacity and motivation to make it happen, a downturn is a great time to shed the corporate lackey life and go to work for yourself.
Alec Lynch is founder and CEO of DesignCrowd.com, a crowdsourcing startup that was born in the height of the Global Financial Crisis.
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