With the financial crunch that accompanies hard economic times comes doubt about decisions regarding money – including doubts about whether or not to start a company.
A recession is generally a difficult time for companies that are trying to raise money from potential investors who are less likely to fund companies when the economy is suffering. For this reason, a recession is not an ideal time to start a company that requires a lot of start-up capital to get off the ground.
But small businesses and technology-based companies are another story. A recession is actually a great time to nurture and incubate a small company.
Here are five reasons why:
1) A recession forces founders to be frugal. Starting a company without a lot of money is an excellent discipline for entrepreneurs and for every early-stage business. While it may feel painful to track every dime, the lessons that frugality teaches are invaluable. Having limited capital leads to creative thinking, healthy deliberation about expenditures, and the need for founders to pay very close attention to cash flow, budgets and balance sheets.
2) Recessions force entrepreneurs to take another close look at their ideas. Incubating a business that is based on a flawed idea won’t work. A great start-up team or a lot of money can lend the appearance of success, but in the long run, a business built on a bad idea will end up standing on shaky legs. During a severe economic downturn, entrepreneurs will be sure to look long and hard at their business ideas before jumping in. A recession will force questions like:
- Will there be a market for this product if customers are cutting back?
- Do I have the capital to get this off the ground without raising money from investors?
- Will the product or service benefit users in both good and bad economic times?
These types of questions will force business owners to refine their thinking — and will leave them with more solid ideas and plans. Provided they choose the right type of business and go about it in the right way, they can still succeed. And if their business can thrive in a recession, think how it will soar when the good times come again.
3) Recessions lead to committed startup teams. A common perception about recessions is that jobs are put in jeopardy. This may not be true, but if people feel nervous about their job security, they probably will not want to leave a comfortable situation — especially for a start-up. But the flip side of this is that anyone who does come to work for a startup will be incredibly committed. A founder will have employees who really believe in his or her vision and products, and/or who love the start-up environment so much that they’re willing to live with the added risk and tough conditions. Those are the types of people entrepreneurs need for their teams.
4) Startups get a head start. Let’s say you have a great idea and you know that you’re going to start a company, but you’re wondering about the timing. What should you do? The answer is: Start now. This will give you a lead over the competition, and will be well worth any extra struggle. When the economy comes out of recession, your business will be that much further along, and that much closer to being ready to raise capital (which will once again be available, with investors eager to invest after sitting on their cash during the down years). You can get a great head start on that day by starting your business now.
5) Recessions toughen up companies. A recession is a great time to start a company, but it isn’t the easiest time to incubate a business. That doesn’t mean entrepreneurs should back away from the challenge, however. Adversity brings out qualities that every entrepreneur needs to succeed – guts, problem-solving, strength and perseverance. Starting a company in the lean times helps develop those qualities more quickly, which will help the startups in the long-run.
Culled.
AboveThePen 