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Companies that start in severe downturns may be better equipped to succeed
More small businesses launch during a recession. Or at least that's the conventional wisdom. Many of the newly unemployed, the theory goes, start their own companies rather than get another job. But statistically the picture is less clear. The Small Business Administration's Office of Advocacy has measured the number of company births (and deaths) between 1989 and 2005, and although years such as 1995 and 2004 produced the most new businesses, it seems that recessions, while not exactly boom times for launching new companies, play an important role, too.
In both of the recessions that fall within the period covered by the SBA data (1990-91 and 2001), business starts had been falling until the year the recession began—but took off again the following year.
While a recession may seem to be a crummy time to launch a new company, Paul Kedrosky, a senior fellow at the Kauffman Foundation, has good news for those who forge ahead. "Companies that are created in a bad economic period are more disposed to succeed," he says. "These entrepreneurs are the few, the proud, and the crazy. They tend to be highly motivated and can work on a shoestring budget."
Aside from the "crazy" part, Peter Eiermann and wife Sally Struever fit Kedrosky's description pretty well. In January 2008, one month after the official start of the current recession, the couple opened home-goods store Eli Phant in Portland, Me., using $45,000 in savings. Deteriorating conditions have forced them to trim the not-yet-profitable store's overhead costs. "I would have been looser and less cautious about this" if the store had opened during a boom, says Eiermann. "So the recession may have helped us. If we can get through this recession, it is a good test of our ability." He adds: "I am hoping this is a lesson and we'll be stronger than if we had opened three years ago."
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