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.”