Starting at the Bottom
Aug. 1, 2001, was not an auspicious date to launch a business. But Kevin Dowd did start QuantumGraphix, a printing company in Louisville, little more than a month before September 11. As some of his local competitors went out of business in the economic slowdown that followed, Dowd snatched up their customer lists. He trumpeted his technological advantage, a computerized prepress procedure that was faster than older ones most of his competitors used. And he insisted on great customer service. "We were the new kid on the block, and the benefit is you have nothing to lose as long as you put yourself out there," Dowd says. Quantum took two years to turn a profit, but it did survive, and today the 32-person, $5 million company is growing about 20% a year.
Dowd is among those entrepreneurs who've discovered a little secret: An economic downturn can be a great time to start a company. Competitors may go out of business, and the cost of labor may fall as more people are laid off and look for work. Commercial rents may decline, allowing you to score office space at a discount, and marketing and advertising expenses also tend to slide. Moreover, companies that get going in recessions often are in better financial shape than those starting during flush times. "In tougher times, it's harder to get into business," says James Schrager, clinical professor of entrepreneurship and strategic management at University of Chicago School of Business. "Those that do tend to be a little more solid, with perhaps smaller and less volatile capital structures that enable them to weather downturns."
Many people who lose their jobs during a slowdown will start their own companies, most as sole proprietors. "Small businesses without employees tend to be countercyclical to the economy," says Brian Headd, an economist for the Small Business Administration's Office of Advocacy in Washington. In 2001, such firms numbered 17 million, but in 2003, after a recession, there were 18.6 million, according to the SBA. And during the 1989 recession, roughly 20% of managers and executives looking for new work started their own companies, compared with about 8% in 2007, says executive staffing firm Challenger, Gray & Christmas in New York. "As a recession wears on, managers and executives, especially the good ones, say the pickings are slim, so this is the time to start a business," says John Challenger, the company's CEO.
Small businesses can benefit from declining commercial rents as vacancies go up. In 2003, for example, the average vacancy rate in business districts nationally rose to more than 15%. At the same time, average rents fell about 20%, according to real estate brokerage Cushman & Wakefield in New York. "For newer businesses, the two main costs are real estate and labor, and they may finally be able to lock in rent for a few years that is lower than at the height of the cycle before," says Maria Sicola, head of national research at Cushman.
In 2002, after Jim Connolly lost his job at a large company, he used $50,000 in savings to start Thomas, Connolly & Phelps, an organizational behavior firm in Bloomington, Ill. "This was a great opportunity for me to jump ship," he says. His niche, helping companies maximize performance of top employees, was a selling point during the recession, when his clients' chief concern was payroll costs.
Connolly found a 700-square-foot office in downtown Bloomington for about $700 a month, some 20% less than the market rate. Similarly, Dowd in early 2004 bought a 2,500-square-foot building in Indianapolis at a low price, $175,000, to house his expanding company and staff. And throughout the recession, as more people lost their jobs, he had his pick of employees at affordable salaries. "I brought in a highly skilled, highly trained professional team that moved my company forward," he says.
No matter what the economic cycle, experts say entrepreneurs should have a passion for what they are doing, as well as a good business idea. "Am I going into this because I have nothing else to turn to, so I better start a business? That may be going from the frying pan to the flame," says Eric Siegel, a lecturer in management at University of Pennsylvania's Wharton School. Schrager agrees. "You still have to have the creative spark to make the business into something that people need," he says. That's good advice for any time.
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