The Entrepreneur Opportunity in Downturns
By Tom Ryan
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?
While there are a number of conditions supporting the growth of entrepreneurial ventures during economic downturns, there are two very important factors that make it difficult for entrepreneurs: (1) difficulty in raising capital to finance the launch and growth of the ventures and (2)lack of consumer interest in exploring new opportunities when they are worried about their financial situation. The firms that have the greatest opportunity to expand in an economic downturn are well established companies that have a strong balance sheet and do not need external funding to finance growth opportunities.
The various sources quoted in the article above have it absolutely right on. Looking at the retail market in particular, rents come down and talent availability goes up. And let’s keep in mind that even if sales crash by 15%, there are still billions of dollars being spent each day. All it’s ever taken is an entrepreneur to have the courage to get out there and do something that’s compelling for the consumer.
As someone currently deeply involved in a startup, I would very much like to believe all the points being made. Perhaps, academically they are sound.
The reality for NOW is that two distinct issues exist, and in particular exist around retail.
First, the degree, extent and depth of the downturn in consumer spending was NOT anticipated by virtually any large retailer. The focus now is not on the future, or even next quarter, but on surviving this quarter…both at the individual level (will I keep my job) and at the corporate level (will we have sufficient liquidity to maintain working capital loan covenants). Merchants are being asked repeatedly what can be done to enhance tomorrow’s 6 hour sale…not what they are going to do innovatively to adapt in the new environment 3 to 6 months from now. This is not a criticism…simply an observation. It is very difficult to think outside the box when the box is crumbling around you. It is also very difficult to take risks on unproven ideas, companies or tactics when the downside is so severe. This will change…probably not until after Holiday is finally over.
Second, the golden rule applies. He who has the gold rules. Entrepreneurs who intended to rely upon their own savings or wealth for the initial runway to market penetration have seen just as much evaporate as anyone else with the market crash. Personal lines of credit for entrepreneurs are just as likely to have been reduced or curtailed as for other individuals. And whether we are talking VC groups, Angels or individual investors, wealth has been hammered. So while the times may soon become better for entrepreneurs, now, even the very best business models and well thought through business plans are subject to the realities of tight money and very poor economic conditions.
Simply as a data point of one, now is a VERY tough time to be an entrepreneur.
Having endured a number of recessions in my retail career, I can tell you from personal experience that the hunt for new ideas is especially prominent during hard times. And this downturn has been no different. Our phones are ringing off the hook on the innovation side of our business. Retailers are looking for new ideas now more than ever before, what, with shrinking consumer budgets, the internet, Walmart and millenials all coming into play at once–now’s clearly the time to “re-think” just about everything you’re doing.
Retailers are especially looking to reconnect with their customers as things have been moving so fast, it’s been very difficult to keep up with prevailing consumer sentiment. Also, you’re probably not going to open many new stores right now, right? So, how do you improve what you’ve got? Or, are there new opportunities for new concepts that are more “customer right” that you can take advantage of (new excitement)? Absolutely. Very exciting times, actually.
I think the next 2 years are going to be a boom for new ideas and it’s going to be up to us to execute on those ideas…you know, like the man said, “we are the change we seek.”
There is no question that innovative ideas are typically more prevalent during tough times. Added to this that existing companies typically experiment more during tough times. One saying that pertains to this is, a crisis is a terrible thing to waste.
What I find interesting though, is that most innovative ideas and experiments are things we should be doing regardless of current economic conditions. We should always be employing fact-based strategies grounded in solid consumer-centric retail principles.
I agree with David B. We provide a low cost innovative service, bringing the newest products, the least price sensitive products, with the least competition to our clients to enable them to make more margin, have more kudos and generate more business. Fabulous, except we cannot afford to do business with the big multiples and just walked away from one of our UK multiples for the reasons stated.
A review of some of the “future great companies” created during the great depression includes many companies which jumped on technological change. But I define technological change as any better way of doing things.
One of the most important American inventions of the 1930s was the supermarket, which had several inventors but top marks probably go to Michael Cullen in Queens. By the end of the depression, several thousand supermarkets were in operation, including those built by older grocery store chains like A&P and Kroger (their stores had been tiny, full service stores). Many of the companies that later led the industry were formed in the 30s.
Another emergent technology was the road and the car. Hence trucking companies, Geico, and Progressive were formed in this era.
Certainly it can be hard to raise money in a down economy–I just had to suspend my fourth startup due to this factor. But there is plenty of money out there for the right ideas (today anything green or social networking is hot). And I believe hard times make consumers particularly receptive to new ideas, especially those that offer value for money (like supermarkets).
Entrepreneurs are always bigger and better sources for new ideas. Large companies are stuck in the rut of having to meet quarterly goals, where their expansion is in the form of line extensions.
Entrepreneurs are not so constrained. Yes, they answer to their investors, but the entire mindset of that relationship is different. Rather than meeting quarterly goals, a start up company is allowed to look 2, 3, even 5 years into the future before producing profits.
Entrepreneurs seems to thrive during downturns. Perhaps some of this is by necessity. When companies are not hiring or in full “cut back mode,” it’s harder to innovate from inside. Conversely, the entrepreneur must innovate.
It will be interesting to look back 10 years from now and see which successful companies were born during the current economic crisis.
Historically, small and midcaps do better in tough economic times. I was speaking to a friend who was recently let go from his executive position at a large telco and he was hinting that venture capital is still available for startups, especially in telco. What does that mean for retail? Probably nothing as most of the innovation comes from product development. But I do agree that young entrepreneurs are born during these tough times as we are forced to thing outside of the box just to survive!
I absolutely agree that this is a good time for entrepreneurs if they have a sound long-term business plan and adequate financing.
However, during times like these many companies have an unfortunate tendency to cling to the familiar–the corporate version of comfort foods. Innovation can breed suspicion and unease. Innovative, radical thinking is great, but has to be tempered with a low-key sell.
When the economic environment changes, shoppers/customers/consumers adjust with it and change their behavior, needs or wants, criteria for purchasing, etc. Entrepreneurs have the opportunity (though not necessarily the advantage) to provide something that is not currently available or suitable in the marketplace for the newly influenced end user.
What the typical response is within most existing companies when confronted by a downturn in the economy, is to cut back on marketing, retract R&D that would have a long-term payback and even then at relatively low levels of success, and reduce expenses when and where possible. The entrepreneur can often run their business with less overhead, fewer embedded costs, and can be more dynamic and flexible to meet the new market’s needs.
The established companies COULD compete more effectively, but fall victim to the human nature aspect of thinking the sky is falling and therefore seek to hold onto what they have, and counter-intuitively open up opportunities for others to grab a slice of market from them.
Opportunities exist in all economic cycles, and there will be companies that succeed, are started, and fail at all times. The need for an effective business model, responsiveness, and ability to serve a sizable enough customer base remains constant.
If I am allowed a commercial here – check out www.startupbuilder.com where I devote an entire website to the how/when/where to start a business and ensure it succeeds.
This downturn started as more of an emotional recession than a macro-economic one and that is due, in part, to corporate (and financial market) anxiety.
Entrepreneurs are, by definition, less risk averse and have correspondingly less to lose. So all things being equal, when corporate anxiety-produced paralysis sets in, entrepreneurs who continue pursuing their passion are in a much better position to succeed.
I make a living with putting niche brands, specialty brands, and entrepreneurial brands on the market for new players, and I completely agree that these are great times for innovation, points of differentiation, and new ideas. However, I speak for all small brands to ask retailers to completely understand that start up companies cannot afford to do business with you if you are not flexible about huge slotting allowances, pay on scan programs, and other barriers to entry that not only prevent innovation, but also put a stop to any new and exciting choices for consumers that shop in your stores.
Not to throw more platitudes in the mix, but necessity is the mother of invention. In down times, the lack of funds is the biggest constraint, driving a new level of creativity. It’s not always the big constraint–but the companies that recognize the constraints that are out there and come up with ways to get around them are the ones that thrive.
I was just recently contrasting Apple and Dell in that regard–in the early days of Dell, no retailer would take on distribution, forcing the company to sell direct and in turn revolutionizing the way computers are purchased. Apple couldn’t get reliable distribution in its retail channel–the retailers that did carry the line never did it justice, to the point where Mac fan-boy volunteers would haunt the aisles of CompUSA just to de-bunk PC myths being told by CompUSA employees. So they decided to open stores. In both cases, a game-changing move born out of a constraint that they couldn’t address head-on.
The real question in my mind is not the link between tight times and innovation–the real question is, how do you avoid complacency when the barriers become much lower?
I’d have to say Nikki Baird strikes at the heart of this issue. A historical analysis of first time start up businesses (“entrepreneurs” by one definition) showed that most were headed by experienced people who had recently lost their “regular job.” I can’t remember the study source well enough to quote it–but I well remember the impression it made.
The theory makes some sense. The most capable people are the ones businesses want to hire to start with. The experience they gain in their “real jobs” only makes them better prepared when they hit the entrepreneurial trail. But most of them are also risk averse, so they don’t hit that trail until they feel they are forced to–either through an actual job loss or a feeling that things are just too bad to stay any longer.
If the foregoing is largely true, however, it calls into question another long-held tenant of management–that we fire the least capable people first. Shouldn’t these be the least likely to succeed in a new venture? Perhaps this gives more credence to the opposite view–that when we circle the wagons in bad times, it is the best people who leave first?
Entrepreneurship is more a state of the innovative mind than a significant component of a dismal economy. True, financing is a vital, necessary factor but the “revelation” comes first. For instance, it’s lucky that the great “entrepreneurial” wheel was invented before the automobile; otherwise, can you imagine the awful screeching in the highways and byways of the world.
Let’s hope that the creative stream flows at all times. And if times get rough, and that’s what they are now, let’s have faith that there will always be equally creative financing sources available to fertilize great ideas and inventions.
I would suggest that one of the reasons that entrepreneurs and innovative ideas are born during recessionary periods is that the recession itself reflects a certain staleness in the economy, a lack of compelling innovation. The weak will go out of business, but as the strong gain more strength they frequently become the captive of their success.
This certainly feels like the case in retail today. There are few innovative retailers whose concepts and presentations are so compelling that they are able to get their price, avoid the spiral of endless price competition, and see their businesses grow.
I think that out of this period there are likely to emerge many new, successful retail ventures, but what may be different this time is that they will be smaller, more narrowly focused, niche-driven players capitalizing on an increasingly fragmented marketplace.