Noora Chahine is the co-founder and developer of the remote web agency Ridwan Studios.
Should You Launch Your Business During an Economic Downturn?
If you listen to common advice on the street, economic recessions are not the time to rock the boat. Instead, we should be putting our heads down, working harder and longer, with little pay, all to prove that we’re valuable employees. Dodging the pink slip can be the difference between keeping a roof over our head or living out of our car. Or, so the advice goes.
It's true - the statistics don’t look good. Participation in the U.S. job market dropped from 66% in 2008 to 62.8 percent in 2016. This is the lowest it's been since the last big recession in the 1970’s. Despite this, the population grew by 21 million in that same period. According to this statistic, more Americans should have entered the job market, but that didn't happen. Things are looking grim and the economic malaise has yet to show signs of letting up.
So it would seem foolish to go against the grain, and start your own business. But that’s exactly what I’m advising. Historical data shows that starting your dream business during economic doldrums may be the best time to do so, but not for reasons you may think. Evidence suggests that startups launched during troubled times tend to stay lean and mean. They are able to weather the ups and downs of of turbulent times with grace. We need only look at three examples:
Microsoft launched right when a recession was putting an end to America’s post-WWII expansion era. Founded by Bill Gates and Paul Allen in 1975, these two college dropouts went on to start one of the best known companies in the world. It all began when they created a program called BASIC, which they sold to a small computer company in New Mexico. Using the proceeds of that sale, they went on to dominate the computing world decades later with their Windows operating system. Last quarter, Microsoft reported a revenue of 23.6 billion.
Revlon started in 1932, during the height of the Great Recession. Despite this, Charles and Joseph Revlon didn’t let the economic downturn stop them from starting their dream business. It took only six years before Revlon became a multi-million dollar enterprise. Today, Revlon pulls in around $1 billion in revenue per year.
The well-known grocery chain got its start during the 1958 recession. With its fresh sea motifs and food and beverage varieties, Trader Joe’s was a hit in California. After years of slowly expanding, the grocery chain finally began opening in other states. Today, Trader Joe’s has an annual revenue of $15 billion and employs over 38,000 people.
Slow Initial Growth May Be OK
These are a few of the companies that started businesses during recessions and found lasting success. Sara Moreira, of Kellogg’s, did a study on startups launched during the 2008 recession. She found that they tend to start smaller and grow smaller. But that’s not due to a lack of investment or inexperience; the recession forced a slower growth and business owners learned how to make due with less.
But is that a bad thing? No, says Moreira.
Historical data shows that companies that grow slow and steady, as recessions usually force them to do, have long term success.
"Companies that grow fast are often foregoing fundamentals — profit, processes, protocols, etc. — which leaves them open to competition,” says Numaan Akram, Founder of Rally Bus, speaking to Business News Daily.
Slower growth means more restraint when spending money and greater opportunities to get the fundamentals right. This goes against the grain of a Wall Street driven economy where investors are looking for skyrocketing growth numbers. But look a little deeper and you'll realize that Wall Street is littered with failed companies. Many of these companies achieved overwhelming success in a short time only to go bankrupt quickly after. The reason is usually the same: speedy growth with little time to get the fundamentals right.
Companies such as Zynga, KIND Snacks and Wise Acre Frozen Treats, are all warnings against growing too fast.
Within 18 months, Wise Acre Frozen Treats had won national accolades for their health food products and raised $1.5 million from investors. But by the end of their second year, they were bankrupt. Now they are nothing more than a footnote in history. The reason? You guessed it: too fast growth in too short of a time.
So against common advice, I’d say: go for it! Start your business when the economy looks to be falling to the wayside. Though growth may be slower, that just may be what your business needs for long term success.
According to Fortune, two thirds of the fastest growing companies will fail within two or three years. Don’t let yours be one of them. Launching your startup at the right time may determine whether your business will join their ranks. Just like the rabbit and the turtle, slow and steady wins the race.
- USA - Civilian labor force participation rate 1990-2016 | Timeline
This graph shows the civilian labor force participation rate in the United States from 1990 to 2016. In 2016, about 62.8 percent of the American population, eligible to work, participated in the job market.
- US Population by Year
US Population table by year, historic, and current data. Current US Population is 325.99 million.
- Startups Launched During a Recession Tend to Start Smaller and Stay Smaller
Yet there are ways business owners can counter these long-term effects.
- Slow and Steady? 4 Smart Ways to Maintain Business Growth
Many startups aim to achieve rapid expansion, but slow, steady growth might actually be more beneficial to your business in the long run.
- My Company Grew Too Fast -- and Went Out of Business - CBS News
Jim Picariello, CEO of Wise Acre Frozen Treats in Blue Hill, Maine, picked up a huge distribution deal, but within the space of months, his company was bankrupt. Find out what brought his business down.
- Why Two-Thirds of the Fastest Growing Companies Fail
Two-thirds of the fastest-growing will hit a wall, according to an Inc Magazine and Kauffman Foundation study.
This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.
© 2017 Noora Chahine