Starting Successful New Companies In Recessions

Posted by: Michael Mandel on May 03

First, my apologies for disappearing for a bit. I was travelling, and then got otherwise distracted.

People have hypothesized that it’s easier to start companies during downturns, because labor, rent, and other resources are cheaper (in economic jargon, the ‘opportunity costs’ are lower). And there have been plenty of news articles talking about out-of-work professionals going into business for themselves.

But here’s a slightly different question—is it easier to start a successful company during a downturn? Not so obvious, is it? It might be easier to start a company, but harder to start a successful one if the economy is weak.

Take a look at the table below, which was put together by Gary Beach, publisher emeritus of CIO magazine. The table, based on the Fortune 500, shows what percentage of top companies were incorporated during a recession (Gary was using Wikipedia’s list of U.S. recessions, which goes back further than the NBER’s list of U.S. recessions).


Based on Fortune 500 percentage that were incorporated into business
during a recession year
Top 10 companies 70%
Top 25 companies 64%
Top 50 companes 52%
Top 100 companies 43%
Top 500 companies 36%
percentage of years that the U.S. has been in recession 39%
Data: Gary Beach

By Gary’s count, the U.S. has been in recession for 39% of its years. Looking at the entire Fortune 500, 36% of them were incorporated into business during recession years, which is no great shakes.

But as we move up to the most successful companies—the ones at the top of the list—the situation changes. Among the top 10 companies, according to Gary, a full 70% were started during recession years.

Let’s look more closely at these top 10.

So this table includes the name of the company; the date that they were incorporated into business (when two companies merged, Gary took the earlier date); whether that was a recession year according to the Wikipedia listing, which Gary used; and then whether it was a recession year, according to NBER dates, which are similar but not identical to the Wikipedia listing.

Top 10 companies
Fortune 500 Date Incorporated  Wikipedia NBER
into Business recession? recession?
Exxon Mobil 1911 No yes
Wal-mart 1962 no no
Chevron 1879 yes yes
ConocoPhillips 1875 yes yes
General Electric 1878 yes yes
General Motors 1908 yes yes
Ford 1903 no yes
AT&T 1885 yes yes
Hewlett-Packard 1939 yes no
Valero Energy 1980 yes yes
70% 80%
Data: Gary Beach, Fortune, NBER, Wikipedia 

Using the NBER business cycle dates, eight out of the top 10 companies incorporated during a recession year. Not bad.

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Reader Comments

Joe Cushing

May 3, 2009 08:21 AM

One missing piece of data that would make sense of this, is what percentage of fortune businesses are founded in either time. If there are far few businesses founded during a rescission but their presence in the 500 list is only a small amount less that, means they were more successful. For example, if only 10% of all business are founded during a recession and 36% of fortune 500 companies are recession founded, that would really mean something.

Anonymous

May 3, 2009 07:10 PM

My guess is that there is a subtle selection issue at work. If someone can put together the assets and financing to found a company during a recession, it probably has better long term prospects than the typical firm created during a boom.

Mike Reardon

May 4, 2009 03:06 AM

I can see new hedge funds becoming giants, reinvesting bank assets to kept commercial paper moving. Any product that comes to market will need there short term finance to support its operations.

LAO

May 4, 2009 04:17 PM

I've been thinking about the "dismal science" (per November blog), and why credit is viewed as so fundamental to business, since, all other things being equal, a business without debt would be more profitable than one burdened by interest or untimely return of principal. Of course, things seldom are equal, and I don't have the data to support the case. It's just that it's tempting to think that there might be a connection -- debt financed economies of scale and cornering of markets, for instance, are not likely to be key factors in the success of a new enterprise.

If nothing else, it seems that a recession is more likely to motivate fiscal prudence at the critical early stages. Of course, we can also hope that it means recessions tend to stir innovation.

CompEng

May 4, 2009 05:13 PM

LAO,

that's one thought. I would think a major factor would be that recessions help weed out the competition. A really good company's dominance isn't helped by competition. For any strong company that *is* able to securing financing, being able to invest in expansion, research, etc. is a huge competitive advantage.

People say that American car companies failed because they didn't build cars Americans want to buy. That's true, but one underlying cause is that they were unwilling or unable to bias their profits towards new research and development because a greater share of their revenue went to things like wages, benefits, and profit than their competition.

Holly Garfield

May 5, 2009 09:11 AM

One advantage of starting a business in a recession is that you get the rebound effect of a rising market as the economy returns to growth. That may be more of a factor than the cost and availability of labor and materials. Another factor may be that by the time a recession is evident much of the fall of the economy is already behind us. A decleared recession is a lagging factor, so a rebound is imminent. Perhpaps that is why the percentage of companies goes up with the ranking. The top companies get that early boost of recovery, so get to be financially sound and able to compete at an early stage. You may find that the lower ranked companies waited until the recession was on the mend before they were founded, and lost the benefit of that early boost. It would be interesting to see at what point in the recession these various companies were founded.

Holly Garfield

May 5, 2009 09:12 AM

One advantage of starting a business in a recession is that you get the rebound effect of a rising market as the economy returns to growth. That may be more of a factor than the cost and availability of labor and materials. Another factor may be that by the time a recession is evident much of the fall of the economy is already behind us. A declared recession is a lagging factor, so a rebound is imminent. Perhaps that is why the percentage of companies goes up with the ranking. The top companies get that early boost of recovery, so get to be financially sound and able to compete at an early stage. You may find that the lower ranked companies waited until the recession was on the mend before they were founded, and lost the benefit of that early boost. It would be interesting to see at what point in the recession these various companies were founded.

CDE

May 5, 2009 10:24 AM

Without examining the data myself, my suspicion is that, like the current recession, there is an overextension of resources (credit, commodities, etc) in expectation of continued expansion *just prior* to the downturn and companies have no choice but to "go live" and ride it out. Those companies with better business plans (or lucky timing for that matter) and deeper pockets are the ones still standing.

Jeff Bridges

May 5, 2009 06:42 PM

While it's certainly interesting to see the percentage of Fortune 500 companies founded during a recession, it might be more interesting to look at when those companies grew to become the corporate behemoths they are today. Is their success a direct result of recession related policies? A corporate philosophy instituted during their founding? What is it about the founding of these companies during recessions that led them to the top of the business world? Or is it merely a coincidence that the most successful of America's most successful companies were founded during hard times?

Aly-Khan Satchu

May 6, 2009 12:32 AM

Recessions are moments of maximum opportunity for those who are nimble and can keep their Heads when everyone is losing theirs.

Aly-Khan Satchu
www.rich.co.ke

empedos

May 7, 2009 03:36 PM

From my personal experience, I know that I have become a lot wiser through my most painful experiences. Good times were nice but contributed much less to what I know today.
Perhaps, a nation's "life" is no different than an individual's life and tries to take new turns during bad times, often partially towards a better direction.
My guess is that recessions tend to contribute to the creation of new successful companies not so much because resources are cheaper but because people start to think more clearly.

Peter Cascone

July 29, 2009 03:23 PM

Downturns also eliminate some competition, in addition to creating a wider hiring pool of lower costing top talent. Employees will accept lower wages and perks, more basic office environments, and sparser staffing. This period of forced austerity keeps costs down, and staff more stable. If these economical pretices can be extended into an upswing, there is a chance for greater profitability and success.

johnathon

November 30, 2009 07:48 AM

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johnathon

November 30, 2009 07:48 AM

your website is blurry and hurts our eyes!!!!!

Thank you for your interest. This blog is no longer active.

 

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Michael Mandel, BW's award-winning chief economist, provides his unique perspective on the hot economic issues of the day. From globalization to the future of work to the ups and downs of the financial markets, Mandel-named 2006 economic journalist of the year by the World Leadership Forum-offers cutting edge analysis and commentary.

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