Entrepeneurship in an economic downturn?

April 8, 2008 5:41 PM

I hear a lot of talk about global recession. Bad time to start a company?

I guess my basic question is: given the generally negative forecast everyone seems to have for the economy, would it be unwise for someone to start their own business now? Also, are these fears US-centric or can I expect equally bad things for Canada?

posted by saraswati to work & money (26 comments total)

Are you starting a hot-dog stand, or an airline?
posted by BitterOldPunk at 5:46 PM on April 8, 2008

Start the type of company that does better when the economy is doing worse, or where it might not make too much difference.
posted by flug at 5:48 PM on April 8, 2008

This depends entirely on the type of company and, if it's a company that depends on local conditions, the particular conditions in your locale.

I wouldn't start a bank right now, but it might be a good time to open a restaurant in Vancouver. It's also probably a pretty good time for energy startups.

And if this is a typical business cycle recession, we'll be starting the recovery within 6-12 months. If you have enough capital to last that long, you might very well be set.
posted by mr_roboto at 5:56 PM on April 8, 2008

Starting a new company is never easy (9 of 10 fail in the first 2 years), but the answer to your question depends on a lot of factors. Every industry and market is subject to a unique business cycle. E.g. now is a better time than ever to be in mining in BC, but terrible for certain manufacturing / processing industries.
posted by randomstriker at 5:56 PM on April 8, 2008

I guess it would've been smart to mention that. It's a small business (somewhere between a hot dog stand and an airline) in the creative industry. Definitely not an "essential service", so I guess the answer is pretty self evident if one assumes that we are in fact going into a recession. A better question would've been: are we really going into a recession? Is it as bad as some people are saying?
posted by saraswati at 5:57 PM on April 8, 2008

Yeah, impossible to say without knowing the nature of the business. Might be hard for a new business to get extensions of credit. But if it's a cash-based business (hot-dog stand, laundromat, etc), that's not really an issue.
posted by Cool Papa Bell at 5:58 PM on April 8, 2008

Even in a recession, some people are going to be paying for some creative services. Perhaps fewer people. But if you have client relationships already, go for it.

A secondary question would be, who are those clients? Not subprime mortgage lenders, I hope! ;)
posted by salvia at 6:15 PM on April 8, 2008

Are you starting a hot-dog stand, or an airline?

Now, now. Why limit yourself to just one or the other? I'd kill for a good transatlantic hot-dog.

Seriously: entertainment and other commodities of escape (from strip clubs to alcohol sales) are the staples that do well in economic downturns. Gambling. Value foods.

Obviously, all business does not stop. People have to eat, etc. Just don't pick a business type that people eliminate when poor.
posted by rokusan at 6:15 PM on April 8, 2008 [1 favorite has favorites]

Definitely not an "essential service", so I guess the answer is pretty self evident if one assumes that we are in fact going into a recession.

Not necessarily so. It depends entirely on the particular market, your business plan, and your available capital and credit.

A better question would've been: are we really going into a recession? Is it as bad as some people are saying?

The Unites States' economy is almost certainly in recession right now. The Canadian economy is currently experiencing a resource boom, and might not be in recession. It might, in fact, be significantly insulated from the US economy by said resource boom. That said, the resource boom is very local, and does not affect all sectors of the Canadian economy equally.

It's very difficult to predict the details of the business cycle; this is something that academic economists, high-paid quantitative finance experts, and top-ranking politicians struggle to do, and often fail at doing. You're not going to get a definite answer here. All that you can do is have a good business plan, have plenty of capital, and assure that your lines of credit are in place.

What Cool Papa Bell says is true: credit could get tight, so perhaps you'd be best to rely more on your own cash reserves. That said, consumer credit is pretty affordable (in historic terms) right now, so if you can get by on that...
posted by mr_roboto at 6:19 PM on April 8, 2008

I can't speak in any detail to the global situation, but I will observe that there are certain factors that are particularly US-centric as of the moment (e.g., the weakening dollar being one of them), but there are certainly other factors that are global (as played out in the failure of Northern Rock, the UK mortgage bank). As for "how bad will it be?" -- well, that's the trillion dollar question right now. There are economists who would argue that everything's going to on the upswing in 6 months, and others who argue we're facing the worst global economic cataclysm since the Great Depression. My personal feeling is that we (the US) are in for a long and pretty severe recession, and that there will certainly be international ramifications of varying degrees. That's just my two cents.

Beyond that, I would say there are some key issues at play in the question of starting a business in even a mild recession. First off, credit may become much harder to come by -- and I think that's especially true this time around, given how much of the crisis was caused by bad loans that shouldn't have been made in the first place. Even applicants with good credit are feeling the pinch on this score. So you can expect to potentially have a harder time getting a business loan.

Second, as others have said, it really depends on what kind of business you plan on running (and just saying it's "in the creative industry" doesn't really narrow it down enough). During a recession, people start cutting back on spending on certain things -- starting with nonessentials. So starting a boutique (for example) will carry a greater risk in a recession than starting the same business during an upturn -- you are simply going to have far fewer people able to spend money (or go into debt, as the case more often is) for luxury clothing when economic times are bad vs. when they're good. But plenty of other businesses provide goods or services that are just as much in demand during good times as bad.
posted by scody at 6:20 PM on April 8, 2008

I work at a company that keeps its ear to the ground with regard to small businesses and we've collected data that indicates that lots of people start businesses during recessions - at a higher rate, in fact. The suspicion widely held within the company is that many people who are laid off look around at the job market and decide it's now or never to start that hot dog stand/airline hybrid business they've been fantasizing about.

I don't know any actual numbers on this, but of the successful small businesses you know, probably a lot of them were born during recessions. Ultimately, watch your cash flow and focus on growing your customer base and you'll still be head and shoulders above many new small businesses.

Now, I would say that now probably isn't the time to start a business where you'll be buying lots of fuel in US dollars...but that's neither here nor there.
posted by crinklebat at 6:26 PM on April 8, 2008

I interpreted "creative" to mean "advertising," and if that's the case, then this could be a fine time to start a business, because as buying slows companies could want to improve their marketing.

If you need financing, you might have a rougher time. Small business publications I've seen are reporting that business loans are harder to get in the US now.

My small business is growing, but I'm in a niche that tends to do well when the economy slows.
posted by PatoPata at 6:26 PM on April 8, 2008

During a recession, people start cutting back on spending on certain things -- starting with nonessentials. So starting a boutique (for example) will carry a greater risk in a recession than starting the same business during an upturn -- you are simply going to have far fewer people able to spend money (or go into debt, as the case more often is) for luxury clothing when economic times are bad vs. when they're good.

Even this is not universally the case. There's been some talk of how this could be a "working class recession", hitting people with jobs in manufacturing, construction, and low-end retail hard while barely touching highly educated professionals. If this is the case (and I'm not saying that it is, but the idea has definitely been floating around), boutiques won't be hit that hard.
posted by mr_roboto at 6:30 PM on April 8, 2008

Even if there is a full-on recession, defined as two consecutive quarters of negative GDP growth, it's still a $13.8 TRILLION dollar economy. Plenty of opportunity there.

Note that growth is slowing, but we have no evidence yet that we've even had one quarter of negative growth. q4 2007 was something like 0.8% growth, which is like 110 billion dollars of growth. Which is pretty amazing considering the pressures of credit, housing, food and fuel.
posted by gjc at 6:58 PM on April 8, 2008

hitting people with jobs in manufacturing, construction, and low-end retail hard while barely touching highly educated professionals.

This is an interesting point. But I don't know that it's exclusively highly educated professionals who are the only ones buying luxury goods. The luxury goods sectors have expanded greatly in the past decade, but it's my understanding that this particular consumer boom was fuelled by significant numbers of middle- and even working-class consumers buying on credit (whether on credit cards or via HELOC's tied to overinflated housing values), thus generating debt that most couldn't actually back with cash -- especially not given that A) savings are at historic lows and B) inflation is on the rise.

Also, the job losses we've already experienced are clearly not tied solely to blue collar industries. How many hundreds of thousands of people are employed in the real estate and financial services sectors? Those jobs are already starting to dry up fast in certain parts of the country -- and, to a degree, it's actually the downturn in those white collar industries that's helping drive the downturn in construction and manufacturing.
posted by scody at 7:11 PM on April 8, 2008

It sounds as if start up cost might be minimal. Your ability to jump to another job would be a determining factor in all of this. You would also want to look at your exposure after start up... do you have significant savings and how long will this keep you afloat? I would also talk to others in the business you are considering- are their sales down because of the economy? A recession might be your friend, if there is one now or one on the horizon, you will be better positioned to take advantage of the upswing as you would of had to work under the worse conditions giving you a better perspective of how to operate in bad times. Also, you could pick up the work that goes unclaimed because others that lived high off the hog evaporated when things took a turn for the worse.
Without knowing specifically what you are wanting to do and what your current situation is, from a funding perspective, it is tough to give you a solid answer regardless of the economy. Just remember there are always opportunities if you work the situation in your favor- every dark cloud has a silver lining.
posted by bkeene12 at 7:44 PM on April 8, 2008

Technically speaking, we are not in a recession. The usual definition of "recession" is two sequential quarters in which GDP declined. GDP is still growing, it just isn't growing as rapidly as it used to.

A different, more informal definition is based on the unemployment rate. 30 years ago "normal" unemployment was considered to be about 5%, which could spike to over 10% during a recession. For the last few years, "normal" has been about 3%, and right now it's up to about 5%.

I hear a lot of talk about global recession.

That always happens during election years when the Republicans control the executive branch, because the left-leaning press wants to inspire voters to toss the bums out. That doesn't mean it's really, you know, true.
posted by Class Goat at 7:53 PM on April 8, 2008

Technically speaking, we are not in a recession.

Technically speaking, we won't know for sure until we get the revised numbers on Q1 of 2008 and final numbers on this quarter. It's entirely possible we're in a 'technical' recession.
posted by mr_roboto at 8:04 PM on April 8, 2008

That always happens during election years when the Republicans control the executive branch, because the left-leaning press wants to inspire voters to toss the bums out.

This is nonsense. I bet you couldn't show me one mainstream article from the 2004 election cycle claiming we were in a global recession. Same for 1988. The economy was pretty shitty in '84 and '92, though.
posted by mr_roboto at 8:10 PM on April 8, 2008

Dude, recession means diddly squat for most businesses, and usually only affects them at the margins. Businesses with long-term profits usually keep making profits in recessions. For us now, it means a 1% slowdown in GDP at the worst. If your new business depends on that 1% margin, you're not in a good business and wouldn't make it through the next cycle anyhow (c.f. highly leveraged hedge funds).

Airlines get screwed because they're lucky if they ever make a profit. Banks get screwed because they leverage off of that money flow. IBM? Coca-Cola? They grow a bit slower than they did before, is all.
posted by FuManchu at 8:11 PM on April 8, 2008

I understand the vice industry fares well in economic downturns. Start one in booze, payday/car title loans, smokes, gambling, porn, or guns.
posted by sourwookie at 8:22 PM on April 8, 2008 [1 favorite has favorites]

A few thoughts.

You don't seem to wish to disclose your business idea, perhaps out of fear of alerting potential competitors. Not to belittle you but if you've thought of it, someone else has too. The opportunity still exists because, as the proverb goes, the road to hell is paved with good intentions. Everyone has ideas, but success is determined in the execution.

Now, let me state again that starting a new business isn't easy. If you're made of the right stuff, the right time to start was yesterday. The stat about 90% of new businesses failing is partly supposed to scare you off, but also partly supposed to motivate you to get off your butt and just try harder, try again, and most importantly JUMP IN AND TRY IT NOW, while you're still young and don't have kids or a mortgage (I'm assuming).

I don't have any entrepreneurial flair, but many of my friends do and over the years I've seen a few key traits which sets them apart from us drones.

First, running a business is an itch they've always had, that they've never stopped scratching. Since they were kids, they've had lemonade stands, participated in Junior Achievement, had all sorts of side deals going on in addition to their main job, etc. They have a drive and a passion that can't be suppressed.

Second, they are ALWAYS scanning for opportunities no matter how big or small, and always jumping in and experimenting. They aren't afraid to make the occasional mistake so long as they are right 51% or 55% of the time so that their net income is positive.

Third, they LEARN FROM THEIR MISTAKES, and see every failure as an opportunity to do better next time. That's why you should have started your new business yesterday, but today is just fine too. It's almost guaranteed you'll go broke at least once, but that's part of the learning process. If you have what it takes, you will turn it around.

I would say that whether or not you have these traits is far more important than where we are in the current economic cycle. There's always money out there to be made; you just gotta find a niche and carve it out for yourself.
posted by randomstriker at 8:52 PM on April 8, 2008 [2 favorites has favorites]

I read a column in the Wall Street Journal a few weeks back about how some specific areas aren't particularly affected during an economic downturn. Not that they're growing 20% a year, but they're not totally being wiped out and struggling to make ends meet. From what I could remember the list included tupperware, jaguar cars, oriental rugs, chocolate... completely random
posted by Jimmie at 9:17 PM on April 8, 2008

I interpreted "creative" to mean "advertising," and if that's the case, then this could be a fine time to start a business, because as buying slows companies could want to improve their marketing.

If the above is correct, then here is the perspective of someone who spent 2001-2003 working for a WPP company: advertising and marketing spend is the canary in the coalmine of the economic cycle. When margins go shit it is the first thing to be cut, long before other cost cutting measures like Q4 travel restrictions are put in place.

I would be very wary of starting a marketing agency of any type going into a recession. Do you really want to be pitching against JWT who'll undercut you to do the work as a loss leader, as a way of staying close to a big client? While research suggests that clients should increase marketing spend in a downturn, the simple point of fact is that they don't.

Also bear in mind that radical, hot-shop ideas tend to gain less traction in difficult economic circumstances. If you're the senior marketing person for a blue chip company and you've had your budget slashed while pressure is being brought to bear on you to deliver sales growth, are you going to go for 'tried and tested' or are you going to take a punt on the unusual idea which might just work? Depends on the quality and nature of work in question obviously but don't underestimate the conservatism of your potential client base in a 'flight from risk' type situation.

If you've got an established client base you'll be taking with you, this could work. Do be very careful about non-compete / no poaching clauses in your contract with your current employer.
posted by dmt at 2:13 AM on April 9, 2008

Can I also flag the following as wisdom:

You don't seem to wish to disclose your business idea, perhaps out of fear of alerting potential competitors. Not to belittle you but if you've thought of it, someone else has too. The opportunity still exists because, as the proverb goes, the road to hell is paved with good intentions. Everyone has ideas, but success is determined in the execution.

Ideas are a dime a dozen. Good ideas might go for a buck. Execution goes for at least $99.99, and you already know you don't know how to execute.
posted by dmt at 2:19 AM on April 9, 2008

Two ideas. If you start your business in lean times, and it succeeds you know it is a winner, for the long term (not some latter day Sharper Image).
Second, if you need to depend on other businesses for your success, they will be keener to see you succeed in hard times, as long as you are not asking for them to take a credit risk.
I have a business idea myself, and a recession in the USA that puts some extra low cost talent on eLance.com will only improve my business in the long term.
posted by bystander at 5:24 AM on April 9, 2008