Why Launch A New Business In A Recession? Why Not? – Forbes
Starting a business during a downturn can be nerve-wracking, yet some of the most famous brands were launched during an economic crisis. Airbnb and Uber began trading during the 2008 global financial crisis; Burger King opened its doors in 1953 when the U.S. was in recession, while Hewlett-Packard was founded in a Palo Alto garage in 1939 during the Great Depression. With the R-word threatening to rear its head again, the key question is why?
According to John Mullins, associate professor of management practice at London Business School and author of ‘Break the Rules! The Six Counter–Conventional Mindsets of Entrepreneurs That Can Help Anyone Change the World’, there are three key reasons.
He says: “Firstly, during or in anticipation of economic downturns, as we are seeing today, large companies are cutting costs and reeling in their ambitions, which means less innovation and less competition for others who innovate. Secondly, many of the resources a startup needs, people, real estate, etc., become more plentiful and cheaper. Third, entrepreneurs with great business ideas are probably more inclined to think, why not give that good idea a go?”
That was the reasoning behind entrepreneur David Davies’s decision to launch Sovereign Beverage Company during the 2008 global recession. He had spotted a gap in the market a year or so earlier while visiting breweries as part of his full-time job and realized that many had an untapped route for sales in the form of global export.
He says: “Why launch at the start of a global recession? My first thought was, why not? If I could make the business thrive, I knew it would be strong and sustainable, and 15 years on, that’s been proven.”
Although the venture was challenged by a lack of cash flow and resources, it ultimately developed an enduring business model. “We don’t hold stock, we sell before we buy, and we pay before we get paid,” says Davies. “We also chose to work with suppliers of products from several different breweries, allowing us to offer a wider range to global customers while keeping the logistics to one supplier.”
There were advantages to their timing. The breweries they worked with were struggling and looking for new ways to increase sales. Sovereign Beverage Company offered them a new, risk-free sales revenue stream. From there, the company focused on finding customers in markets less impacted by the financial crisis.
“The recession forced us to develop a very slick and efficient operation, which we still follow today,” says Davies. “For that reason, I would absolutely do it again. Questions were asked about our decision to start trading during a recession, but in my view, it was the best time to start.”
2008 was also the year that Konrad Bergström founded Swedish tech giant Zound Industries. Zound transformed the famous Jim Marshall rock’n’roll amps – used by Jimi Hendrix at Woodstock – into a range of home speakers and headphones sold in 130 countries.
Before this, he had set up the lifestyle distribution business Megascene Agency and brought international brands such as Quiksilver and Burton to success in the Nordics. But in 2004, Bergström had to file for bankruptcy. Despite huge debts, business contacts turning their back on him and having to sleep in his car with his dog, he believed that better things lay ahead. Not even the recession could impair his belief in Zound and its potential to disrupt the market.
“It’s easy to think of doom and gloom when the economy plummets,” he says. “What I saw was a huge opportunity to create a lean, finely-tuned business and position it for long-term success.”
A lack of external funding in the shape of investment, bank loans and government startup funding was a significant challenge. “We found solutions in adapting payment terms, nailing and benefiting from distribution rights and getting family and friends to invest,” he says. “Establishing distribution through companies that had survived and were still aggressive was also key, but required far more planning as the market was less forgiving.”
With a recession looking increasingly likely, Bergström’s advice to other entrepreneurs considering starting up is to retain a positive mental attitude and to focus on working with facts. “So many people consider a recession a hellish landscape,” he says. “It is an opportunity, and you must truly believe that to succeed.”
John Mullins agrees that such mindsets are vital to enhancing an entrepreneur’s chance of success in adverse startup conditions, enabling them to break many of the conventional rules by which established businesses operate and encouraging them to focus on narrowly defined target markets with compelling problems to solve.
He says: “Big companies tend to ignore opportunities that won’t ‘move the needle.’ Entrepreneurs ‘borrow’ underutilized assets owned by others instead of investing their own money, at least until market demand is proven. They ask their customers to pay upfront and use that cash to fund the growth of their business, paying their suppliers long after the product has been built and delivered.”
Finally, he adds, entrepreneurs with the right mindset don’t ask permission. In the face of legal or other ambiguities, they press on, figuring they’ll beg forgiveness later if they must. “Had Uber’s founders asked permission of the taxi regulators in San Francisco, Uber, and perhaps the rest of the gig economy, might not exist today,” adds Mullins.