Theories abound that economic downturns are conversely ripe times for entrepreneurs, partly because so many venerable companies are born during tough times. The reasons range from having fewer competitors in the marketplace to filling a void for innovation and new ideas in the marketplace.
Writing in Business Week, Vivek Wadhwa, Wertheim Fellow at the Harvard Law School, cited several advantages for start-ups during recessionary periods. These include less competition as many "me-too" companies go out of business, as well as lower costs for retail estate, equipment, materials and even people. Recruiting becomes easier as many people get laid off. Finally, there's less pressure to expand.
"You can conceive of better products, test them carefully to make sure they work and meet customer needs, and experiment with different business models," wrote Mr. Wadhwa.
He noted that although funding is tougher, money for start-ups often comes from personal savings or borrowings from friends and family.
More debatable is whether entrepreneurs become more counted on as sources of innovation during downturns due to a tendency by corporations to cut back on R&D as well as the more bold projects that require longer paybacks.
Writing in Forbes, Rich Karlgaard noted that companies born out of the seventies included Southwest Airlines, FedEx, Microsoft, Genentech, Apple, SAS Institute and Oracle. He believes the tough conditions at the time - high taxes, inflation, political turmoil, bearish stock market - drove bright young people into unconventional careers.
"Picture Bill Gates in the 1970s, with an SAT score of 1590 and a burning ambition," wrote Mr. Karlgaard. "What existing jobs could possibly have satisfied young Gates? Wall Street was a sleepy place back then. IBM was a blue-suit, white-shirt workplace. Bell Labs stimulated the brain but offered little adrenalin. Entrepreneurship was where it was at."
Also writing in Forbes, George Gilder, a venture capitalist and founding fellow of a conservative think tank, said a similar situation occurred out of dot.com "bubble" in which companies like Google and MySpace emerged to "take all the chips and establish a new Internet economy."
Looking furthest back, David Silverman, author of Typo: The Last American Typesetter or How I Made and Lost 4 Million Dollars, pointed out that Motorola, Hewlett-Packard, Xerox, Ryder, Unisys, Texas Instruments, Revlon, Converse, La-Z-Boy and Interstate Bakeries were all born in the Great Depression.
"Good ideas implemented well always have room to succeed," wrote Mr. Silverman on Harvard Business' website. "[But] limited consumer funds means that more attention is given to every purchase, and therefore the best new ideas and products have a better chance of success during a downturn because the competition can't provide the same value."
Discussion Questions: Do you think entrepreneurs gain any advantages during downturns? Are entrepreneurs looked on as bigger sources for new ideas during recessionary periods than during better times?