Thinking of Starting Up in a Recession?

Posted by: Stacy Perman on December 11, 2008

Given the tsunami of grim statistics and an even grimmer economic outlook going forward, the Ewing Kauffman Foundation, a private, nonpartisan organization supporting entrepreneurship and innovation, decided to examine the relationship between company success and economic conditions at the time of a firm’s founding and how those conditions impact a startup’s later success.

In the study, “Entrepreneurs and Recessions: Do Downturns Matter?” released today, Kauffmann researchers looked at a list of almost 8,500 companies launched between 1831 and 2006 that went public between 1975 and 2006 – matching the nine economic recessions that transpired against the periods in which each company was founded. Some of the successful companies that the study looked at included Genentech, Microsoft, Southwest Airlines, Morgan Stanley, Allstate, and Krispy Kreme.

The study. headed by senior fellow Paul Kedrosky found that it is slightly more likely that a post-1975 IPO came from a non-recessionary period.

The non-recessionary group’s productivity was 83 IPO companies per year, while the recession subset’s productivity was 70 companies per year making initial public offerings.

However, removing the Great Depression and WWII years, both of which have exceptional conditions, shows that 138 companies per year went public in expansion periods, and 140 in recession periods. These data therefore suggest that the likelihood of a company being part of the public IPO set post-1975 is unrelated to whether it came from a recessionary or non-recessionary period.


In short: the Kauffman study found that fewer companies are founded during weak economic periods and that companies established during those periods might be expected to fail at higher rates than those firms founded during more robust times. Lastly, the combination of lower birth rates and higher failure rates may work to reduce the number of outfits established during recessionary periods.

The upshot then is that it is possible to expect fewer companies with enduring success to be launched in a downturn. At the same time the study suggests that recessions simply produce far fewer quality companies than those founded during boom times. As Carl Schramm, the Kauffman’s president and CEO explains: “This study shows that the relationship between company success and economic conditions at the time of a company’s founding is not well understood.”

Reader Comments

Ken Ducey, Jr.

December 16, 2008 11:45 AM

This study measures success by only one criteria, whether or not that startup went public. This could be very misleading, especially if they did not include companies that were purchased by public companies, or companies that eventually went public.

In my experience working with many successful small companies, recessions are the best time to begin. A typical startup is struggling with capital and resources, which is normally a competitive disadvantage, but can be an advantage when a larger less flexible firm experiences those problems halfway through their lifecycle.

Also, resources such as management, furniture, facilities become available at a much lower cost. Competition to the startup is sometimes limited, and sometimes eliminated by a recession.

When the recessionary times end, the startup gets to take full advantage of the upside, and can ride the wave for an extended period, as opposed to only riding it for a period of time before the next downturn.

Ken
http:\\www.princetoncapitalllc.com

Jeff Ogden

August 17, 2010 8:59 PM

I started a business 18 months ago in the teeth of the worst recession since the Great Depression. It's been a long hard slog, but we've having by far our best month ever! The future looks very bright.

Jeff Ogden, the Fearless Competitor
Find New Customers "Lead Generation Made Simple"
http://www.findnewcustomers.com

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