Not to sound like a politician, but I heartily believe in the promise of American entrepreneurship and ingenuity. Time and again, we’ve shown strength in even the worst of times...like right now. That strength often comes in the form of newly minted corporations setting out to change the world (and maybe exit profitably).
It makes me wonder: What if the worst of times for the economy are actually the best of times for entrepreneurs? Based on what I’ve learned from Christine and David this week and what I’ve read on Twitter this lifetime, companies founded during recessions are fundamentally more resilient, more innovative, and more agile. That means they’ll do better in the long term.
Why? Steel is forged in fire. If a company and a founder can make it through what has now become one big, bad joke of a year, they can make it through anything. Any entity willing to put it all out there when the sh*t hits the fan has my backing. Let me explain.
Recessions separate the wheat from the chaff. For every Uber (founded March 2009), there will be countless failed startups that don’t make it. In fact, about 20% of new businesses don’t survive their first year in good times. In economic downswings, that percentage balloons.
- But that’s a good thing—our capitalist system is Darwinian. Survival of the fittest in business often portends strong returns for investors and lower prices for customers.
- Perhaps we’d experience fewer colossal coming-of-age failures (ahem, WeWork) if there had been a tad less venture money to go around over the last decade.
Businesses built during recessions are businesses built out of sincere need. When 40 million people are filing for unemployment, we don’t need another DTC dog toy startup. We need solutions. And solution-oriented businesses are the kinds founded when the going gets tough. Take two of the prime examples of successful entrepreneurial pursuits started during the last recession: Uber and Airbnb.
- The gig economy had existed for generations, but these two companies were the ones that assured the modern business world it could be massively profitable.
- They 1) disrupted stale business models and 2) presented a way for people to make money with things they already had (houses and cars) during a time when median household income dropped 4.2%.
Business models have to be strong to survive recessions. I’m not saying companies that wait until their Series W to find product/market fit are bad, I’m just saying they’re not as strong as companies willing to bootstrap themselves into existence.
Waiting around for the VC fairies to sprinkle some magic money dust on your startup is not a wise decision right now—venture firms are busier triaging their portfolio companies than writing new checks, and I expect LPs to dry up should this hellscape continue. So why build a company that needs outside funding to grow?
Focusing on profitability (or at least—say it with me—a path to profitability) from day zero makes for a more financially stable company come day 365 and beyond.
Of course, entrepreneurial success requires more than moxie. Fundamentals matter. And fundamentals during an economic downturn are ripe for the founding. A few worth considering?
Low interest rates. They make borrowing cheaper. Sure, when interest rates are as historically low as they’ve been this last decade, the Fed is limited in what it can do to stoke recovery...but that’s a problem for future Jerome Powell. For enterprising founders, it means easy access to capital.
A favorable labor market. An endless supply of people looking for work is bad, especially for the people looking for work. But for a startup thirsting for talented candidates, it’s not so bad. And labor might even be cheaper than it would be in economic good times—better to have a job that pays slightly less than to not have one at all, right?
- FYI, this relationship goes both ways: unemployment breeds entrepreneurship. In one study from 2013, higher local unemployment rates in about 250 metropolitan areas were tied to higher rates of entrepreneurship.
Reduced competition. A startup’s greatest strength is agility—agility that larger companies lack in a market downturn. It’s easier to hoover up market share when the multinational megacorp you’re looking to unseat is busy pandering to Wall Street analysts quick with a “sell” rating.
There are drawbacks to launching in a time of economic contraction. Both consumers and investors (if you need them) can be stingier than usual. But the possibility of being shortchanged is nothing compared to the possibility of innovation that lasts well beyond an economic cycle. If you can weather the storm, the proverbial rainbow is well worth it.
What does the business model of the future look like? My bet is on telehealth, remote work solutions, maybe sourdough? I’m not sure what the next Uber or Airbnb will be, but I have a feeling its founders will look back on 2020 with a little less angst than the rest of us.
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