Recessions Don't Spark More Startups

Posted by: Nick Leiber on January 13, 2010

Do bad economic times mean a surge of new businesses? Not at all, according to a study by Dane Stangler and Paul Kedrosky released today by the Kauffman Foundation. Exploring Firm Formation: Why Is the Number of New Firms Constant? shows factors that might bear on prospective entrepreneurs’ decisions to form new companies—recessions, expansions, tax changes, population growth, scarce or abundant capital, technological advances—has little impact on the pace of U.S. startups. In fact, the study, which used firm formation datasets from the Census Bureau, Small Business Administration, and Bureau of Labor Statistics, shows the annual number of new companies founded in the U.S. remains steady from year to year. More from the press release:

Likewise, the study showed that entrepreneurship education and venture capital, two indicators that have received heightened attention in recent years, had no appreciable impact on entrepreneurial activity in the United States. However, the authors point out, it could very well be that entrepreneurship education, venture capital and similar entrepreneur-friendly measures have helped maintain a constant level of firm formation.

[…]

Perhaps, the authors say, the volume of new firms is irrelevant. The impact of firms is what matters, and it doesn’t necessarily require a certain number of startups to make a given impact. Google, for example, was one of dozens of search engines founded during the dotcom frenzy, but it has had more impact than all the others combined.

Of course, starting a business during a recession has its benefits. In her February article, All in the Timing, Stacy Perman interviewed Kedrosky about his take on when to launch: “Companies that are created in a bad economic period are more disposed to succeed. These entrepreneurs are the few, the proud, and the crazy. They tend to be highly motivated and can work on a shoestring budget.”

Reader Comments

Tom Mulhall

January 13, 2010 2:21 PM

Starting a business during or right after a recession has advantages if you are well capitalized.

We started our boutique resort Terra Cotta Inn, Palm Springs, CA in 1994 which was a time when a worldwide recession was just ending.

Our competitors were financially weakened. We were able to buy a property at a fair price and come in at great rates and have one of the highest occupancy rates in Palm Springs even today.

So if you have capital and a good plan, do not be afraid to start a new business in these scary times.

Tom Mulhall

January 13, 2010 3:00 PM

Starting a business during or right after a recession has advantages if you are well capitalized.

We started our boutique resort Terra Cotta Inn, Palm Springs, CA in 1994 which was a time when a worldwide recession was just ending.

Our competitors were financially weakened. We were able to buy a property at a fair price and come in at great rates and have one of the highest occupancy rates in Palm Springs even today.

So if you have capital and a good plan, do not be afraid to start a new business in these scary times.

Susan Martin

January 13, 2010 3:23 PM

I guess it depends on how you look at it, from where I sit I see a lot of people trying to go it alone whenever there is an increase in unemployment, however many of them drop it as soon as the right job opportunity comes along. Perhaps these stats don't make it into the census data for a variety of reasons, but I'm quite sure that they're out there.

http://www.business-sanity.com

Steve Monas

January 13, 2010 3:46 PM

I just purchased and started a Taxi Business on the island of Kauai, where the recession has hit the tourism industry pretty hard. Pono Taxi (www.PonoTaxi.com) was officially launched on January 1, 2010.

As an entrepreneur, and published shoestring business author (Shoestring Venture: The Startup Bible) I am confident that my business model will succeed in the long term. I have used a combination of search engine optimization, and old fashioned face to face hand-shaking with local businesses, has given my business a steady stream of fares since I had launched.

Everybody can do this, I don't mean for this to be an advertisement, but we our offering the Kindle version of our book for under a buck (.99). This book gives entrepreneurs tools and resources to make better business decisions. Whether they started a Taxi business or want to do a web company. This book helps.

Marshall Hoffman

January 13, 2010 7:34 PM

The Global Entrepreneurship Monitor has much better data. Why didn't you use it.

Dennis Donahue

January 14, 2010 11:40 AM

Please identify the Global Entrepreneurship Monitor reports that you believe has better data.

Michael Mulhall

January 14, 2010 10:58 PM

Tom Mulhall...I wonder if we're in any way related.

I like to think of myself among the few, the proud and the crazy entrepreneurs as well. I opened a new restaurant concept, Merengue Bakery & Cafe, in Monrovia, CA right when the economy collapsed. Ouch!

I was able to secure more favorable lease terms, cheaper labor rates, etc. I couldn't get a loan for the life of me, but if you're creative, you can find money elsewhere. We were able to convince the city itself to loan us the money under their redevelopment program.

I don't think this recession sparked as many start-ups as it crushed. But again I look at that as an advantage. Because of this economic plight, I've been forced to re-educate myself on how to run a truly lean business model. And if I can make it out of this, I can make it out of anything! While the competition is closing all around us, we're finding ways to only get stronger.

http://www.makingmike.com

Dennis Donahue

January 15, 2010 11:49 AM

The worldwide report for 2009 is available on the GEM main page (www.gemconsortium.org - tree on the front cover).

It appears that GEM may already seen the trends in their data showing the relationship between entrepreneurship and recession and has scheduled a conference for June 2010 on “Entrepreneurship and the Creative Economy”(www.gemconsortium.org/article.aspx?id=81). If I am correct, the data already appears to indicate that the deeper the recession, the more people will decide to engage in entrepreneurial ventures. The official deadline on the call for papers has passed.

robert

January 16, 2010 7:52 AM

Small business

With Facebook and Twitter being among the leaders of the Social networks, marketing as a small business is being transformed..
Respondents according to the Vertical Response survey appear to need some differentiation with the use of SE marketing and Social media Marketing

www.onlineuniversalwork.com

Carol Cross

January 16, 2010 2:22 PM

Michael Mulhall points oput the advantages of starting a business in a recession but realistically states that he doesn't "think this recession sparked as many start-ups as it crushed."

Of course, franchising is known to grow in recessions because those looking for a means of producing income think that a franchise is a "proven" business model with a proven record of success. The need for a job provides more prospects for enterprising franchisors, mature and new, alike, to maintain and even grow their EBITDAs during recessions.

This recession, however, may be different because many of those current franchisees teetering at breakeven or below and trying to reach breakeven may not be considered to be good credit risks and will eventually fail.

The lack of reliable and objective government statistics on small business startups and entrepreneurial success should be corrected, shouldn't it?

http://thegreatfranchisingrobbery.blogspot/com

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What's it like to run your own company today? Entrepreneurs face multiple hurdles new and old, from raising capital and managing employees to keeping up with technology and competing in a global marketplace. In this blog, the Small Business channel's John Tozzi and Nick Leiber discuss the news, trends, and ideas that matter to small business owners. Follow them on Twitter @newentrepreneur.

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