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Starting a business in a bad economy

Mitchell Hartman Nov 18, 2008

Starting a business in a bad economy

Mitchell Hartman Nov 18, 2008


Kai Ryssdal: We told you earlier about Hewlett-Packard and the rare dose of good news it delivered this morning. HP’s not only an economic success story, at least this quarter, it’s a famously positive entrepreneurial story, as well. Bill Hewlett and David Packard started the company in a garage in Palo Alto, California, nearly 70 years ago.

This week, thousands of people are attending events around the world as part of something called Global Entrepreneurship Week. It’s a program designed to encourage entrepreneurship among young people. One of its founders is the Kauffman Foundation, which you should know is an underwriter of this program. But no matter where the money’s coming from, is this any time to start a new business, when the economy is shrinking?

From the Marketplaces Entrepreneurship Desk at Oregon Public Broadcasting, Mitchell Hartman reports.

Mitchell Hartman:
When I started checking with entrepreneurs about whether this is a good time to launch, I got one answer over and over that I didn’t expect. It’s all about disappearing jobs, they said.

Vivek Wadhwa: If you want to hire people, they’ll readily join you, especially if they’ve been laid off, as is happening right now.

That’s Vivek Wadhwa. He’s founded two technology companies and now researches entrepreneurship at Duke and Harvard.

Robin Jones is also getting a bounce from others’ employment adversity. She has one Silicon Valley startup under her belt and is launching another in high-end cell phone accessories from Portland.

Robin Jones: We are actually seeing the effects of having the best people that are either getting laid off or are consultants that were always booked, that aren’t always booked now.

Not only will potential employees and consultants return phone calls these days, they’ll work for equity in addition to cash. And there are other advantages to starting up in recession. Rent is cheap. And people like web designers and graphic artists may offer their services at a discount. After all, they’re hurting for business too.
Over at the Small Business Development Center in Portland, advisor Jackie Babicky-Peterson is also seeing unemployment and entrepreneurship meet, but not necessarily in a good way.

Jackie Babicky-Peterson: What I’m seeing is a lot of people who have been laid off from companies, so they’re deciding this is a good time to launch a business, even though it may be very difficult.

Many of these people will rush into business for themselves without sufficient planning, Babicky-Peterson says. And with little or no savings, they’ll use personal credit cards to get going.

Babicky-Peterson: Just pure startup money is now, and almost always has been, pretty impossible. Credit cards are an easy way to go, and they will kill you.

All of which doesn’t leave her feeling very hopeful for many of today’s unemployment-induced entrepreneurs.

Babicky-Peterson: We have a big failure rate already as it is, and you know, I think we will have more failures.

But that’s not nearly so likely with seasoned entrepreneurs like Robin Jones. She and a business partner in Singapore have self-funded their company — called 88 Inc. — to the tune of $75,000. They’ve developed a line of jewelry that doubles as consumer electronics: think, Bluetooth earpiece in the shape of a fancy necklace. Now they need $350,000 in angel investment to get into stores like Neiman Marcus and Barneys New York by fall 2009. Jones’ pitch is ready-made for recession.

Jones: I think there are a set of investors that recognize that the best time to invest is when values are low.

Meaning, investors can buy stakes in hungry startups on the cheap. People like Jones need the money, and investors who have lost big in stocks and real estate, need the bargains. Vivek Wadhwa points out that the Fortune 500 is full of companies that were founded during down times: from Johnson and Johnson, to Disney, Cisco and Intel.

But isn’t this a different kind of recession with bank lending seized up and widespread financial panic? That is the view of at least one leading small-business organization I talked to, which right now is not predicting a big surge in startups.
But Wadhwa says that’s the wrong conclusion to draw from current economic conditions.

Wadhwa: After every crash, it looks like the world is going to come to an end. We’ll be back on track in two or three years. By that time, you’ve gotten your business model working, you’ve gotten your products perfected, you know your customers, you know your market space. And now you can go to the angel investors and venture capitalists and pitch a real company to them.

Wadhwa says the challenge, as always, will be money. He says banks and investors are very tight with it now. So if you don’t have funding from your own nest egg or from friends and family, you can pretty much forget about going from zero to startup during this downturn.

I’m Mitchell Hartman for Marketplace.

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