An economic recession is commonly defined as: “two consecutive quarters in which a country’s gross domestic product shrinks”. Even though the concept of a recession carries with it many negative connotations,recessions are also often hotbeds for innovation and many of today’s large powerful global companies were started by brave, enterprising entrepreneurs during an economic downturn: Microsoft, Walt Disney,General Motors, IBM, Toys “R” Us, Hewlett Packard, UPS and Wikipedia were all founded during recessionary times.
Potential clients open to new options
During an economic downturn, many companies are seriously looking for ways to save costs. They are therefore open to change and willing to consider options which offer them better value. A new start-up that offers an existing firm a better value proposition than what they are currently getting is likely to have an easy time convincing them to switch. During an economic downturn companies let go of their supplier loyalty to uncover innovative new ways to save costs and this gives new start-up businesses new sales opportunities.
Talent comes cheap
One of the largest expenses for many start-up businesses is the salary bill. During boom times salary expectations can sky rocket. During a downturn employees and contractors have fewer options and they are willing to work on terms that are more favourable to the entrepreneur.Many of today’s most successful web companies were founded by savvy entrepreneurs after the dot.com bubble burst, when there was a dearth of talented IT people looking for jobs and willing to work for very reasonable rates. In boom times talent is expensive; in a downturn talent can be accessed at far more favourable rates giving you the opportunity to get your business off the ground without overspending on people.
Excess capacity at suppliers
A recession is almost always preceded by a period of high demand. In times of high demand, suppliers build up capacity. When demand drops off, most suppliers have excess capacity. As a start-up company, in boom times, you have very little sway with suppliers but in a recession when they have excess capacity, you have more negotiating power. You can negotiate favourable payment terms and other benefits to be able to start your business off on the lowest cost base possible. In boom times many suppliers won’t even talk to an insignificant start-up, in a downturn they are scrabbling for business and will want to work with you on your terms.
What you do to make a downturn in the economy work in your favour as you launch a new business
To take advantage of the opportunities that arise during a downturn,you need courage. Peter Drucker said: “Whenever you see a successful business, someone once made a courageous decision” and that is exactly what is required to establish a new successful business in this day and age. In addition to courage, flexibility, focus and the will to negotiate will stand you in good stead as you launch your start-up.
Don’t be too locked in – adapt
Downturns in an economy are times of uncertainty, therefore don’t put too big a bet on what the future may hold. Many of the businesses mentioned earlier in this article were successful because they were adaptable. After getting into business in a downturn, the founders realised that new opportunities were emerging as the downturn came to an end. The key lesson is that all downturns are followed by up turns and entrepreneurs who are already operating and are flexible enough to be able to respond to new opportunities will be the ones to benefit most from an upturn. Set your business up so that you are moving positively in a general direction and be ready to pounce on new opportunities as they arise.
Focus on what counts
During an economic downturn many incumbent firms will be distracted by non-value adding activities such as layoffs, restructuring, and cost cutting. Firms engaged in such activities tend to forget about the customer. As an entrepreneur it is critical for you to focus intensely on your customers. The two most important activities for a start-up are making sales and generating cash and to do these two things, you need to please customers. As you please customers you can build up new levels of customer loyalty. This creates a solid platform from which to build and grow your business in the future.
During a downturn a start-up entrepreneur should keep negotiating.Don’t just accept list prices or terms. Always seek to make your situation more favourable. During a downturn when companies are scrambling for work and can be desperate to make sales they may be more flexible in negotiating contracts to keep you happy as a customer. As you start your business during a downturn be sure that you are ready to negotiate at every opportunity, don’t accept things too easily or quickly.
Warren Buffet said: “Be fearful when others are greedy, be greedy when others are fearful”. This quote is as true for investing in the stock market (the context for the original statement) as it is for investing your time and energy in starting a new venture. Most people will shy away from launching a start-up during a recession but it is exactly that fear that opens the door of opportunity for you to establish the foundations of a new profitable, powerful enterprise.
Downturn start-up success stories: Flickr USA
Scarcity of funds and resources trigger creativity & innovation: Caterina Fake & Stewart Butterfield – co-founders of Flickr.com
Husband and wife, Stewart Butterfield and Caterina Fake, started a company originally called Ludicorp soon after the dot.com bust in early 2002. Many would have suggested that it was an unwise time to start a new technology company.
There was very little to no external funding available, IT start-ups had a reputation for being fly-by-night operations and most new opportunities were thought to have disappeared when the NASDAQ crashed in 2000 and 2001. Yet the pair of entrepreneurs set out to create a new multiplayer online game called “Game Neverending”. Fake describes their timing as follows: “This was in 2002 and it was still in the great technology bust period. There were failed dot.coms all over the place, office space was cheap and some really awesome developers were available, who wouldn’t otherwise have been out on the open market two years earlier. So it was actually really well timed. I think that the timing was important because you could operate in a much more independent mode.”
Less start-up capital – greater speed & innovation
As the husband and wife team were developing their online game, which was to be their first major product, the back-end development fell behind the front-end development, and so while they were waiting for the back-end to catch up – being restless hacker types – they built an application that would allow players in the game to share pictures. After a while they realised that the picture sharing feature that they had randomly developed may have a broader application and be more valuable than the game itself.
They called the picture sharing application Flickr and launched it as an independent photo sharing website. “So Flickr started off as a feature. It wasn’t really a product. It was a kind of Instant Messaging which you could drag and drop photos onto people’s desktops and show them what you were looking at. We built it really fast; we had a lot of the technology already from the game, but we built the first instance of Flickr in eight weeks,” explains Fake. The photo sharing website, Flickr, soon became incredibly popular and Fake and Butterfield abandoned development of the game to focus on the website. Flickr was recognised as one of the pre-eminent Web 2.0 applications and was bought by Yahoo in 2005 for a reported $35 million. Fake suggests that starting in a downturn contributed to their success: “The money was scarce, but I’m a big believer that constraints inspire creativity. The less money you have, the fewer people and resources you have, the more creative you have to become. I think that had a lot to do with why we were able to iterate and innovate so fast.”
Downturn start-up success story: Clif Bar USA
Negotiations with designers, Manufacturers & distributors result in big payoff: Gary Erikson – founder of clif bar
While on a 175 mile bike ride in November 1990, Gary Erikson decided to create a company that would produce energy bars for people participating in endurance activities. He was living in San Francisco and at the time the USA was caught in the grips of a nasty recession, not that Erikson knew or cared. He worked with his mother, an accomplished baker and cook, to develop a bar that would be both tasty and nutritious.
After months of experimentation in his mother’s kitchen he had developed a bar that he was confident would appeal to cyclists, runners, climbers and others who needed easy access to nutritious food. He then needed to find a company to manufacture his bars, a distributor to get the bar into sports stores and a designer to help him develop the packaging. He found all three fairly quickly and easily, primarily because they were all looking for extra work, having been hit by the recession (not that Erikson knew this at the time).
The contract manufacturers were “delighted to do business with him” as his bars absorbed some of their excess capacity. The designer was able to devote time and attention to his packaging and his new brand and the distributor had the capability to begin distributing his products “as soon as they were ready”.
He called the products Clif bars after his father, Clif Erikson, who had instilled the love for the mountains and the outdoors in him at a young age. By the time he had his manufacturing and distribution arrangements in place it was 1992 and the economy was starting to pick up. In year one he sold $700 000 worth of Clif Bars and in year two he sold $1,2 million worth of bars. The business has gone through many ups and downs but it is now a profitable private company with $200 million in annual sales and a reach across the globe.
A business built on fortune & determination
It is only in retrospect that Erikson realises how fortunate he was to have started when he did. He was unaware of an economic recession so he just forged ahead, focusing on product development and distribution while his competitors were being distracted by many other financial and people issues. He also realises now that contract manufacturers and distributors would ordinarily shy away from working with a start-up company because the volumes are too small and the risk too high. But in a recession, when they need work, a start-up business becomes an attractive proposition.
Downturn start-up success story: Trainiac SA
Delivery on the customers’ changing needs and tight financial control spark success: Rob Dennison – founder of Trainiac
In 2001 Rob Dennison was recovering from having been part of a failed VC funded technology company that had gone belly up during the dot.com bust. After returning to South Africa from Boston, his top priority was to create a sustainable growth business requiring minimal capital. He did not care that South Africa was in a cycle of declining GDP growth or that there were recession fears in a number of economies across the globe. What he cared about was proving to himself that he could be successful as an entrepreneur and he cared about creating something that would allow him and his family to lead a comfortable fulfilling life.
A unique product creates its own gap
What he lacked in resources, he made up for in energy and creativity, developing innovative picture based learning products from the office in the cottage in his backyard. He chose to enter the training industry because skills development was supposed to be “the next big thing” with the enactment of the skills development legislation in South Africa. He also liked training as an industry because it is an area where “creativity, not capital, creates a barrier to entry”. He had no capital but knew that as an entrepreneur and innovator, he could be creative.
In retrospect Dennison realises that the uncertain economic environment probably helped him win his first client. A major multinational company was looking to revamp its training programme for low-end employees and Trainiac’s unique picture based learning tools and methodology offered the chance to drastically reduce the training cost per employee while increasing the retention and enjoyment of the employees participating in the training. If times had not been tough, Dennison concedes that this client may not have been looking to do things differently. “They were under cost pressure and were therefore looking for an alternative approach; we offered them a value for money solution,” says Dennison.
Worthwhile disciplined financial control
In the first few years of operation Dennison and the Trainiac team did not worry about the economy because they were more worried about their own survival. “Being in survival mode forces you to learn to be lean… and operating with a very low cost base allows you to survive in any economy,” says Dennison. “We only bought the fourth desk when the sixth person arrived… looking for every possible way to save money and the philosophy of not over-spending on anything still runs deep in the company today”.
Still today, Dennison keeps a very close eye on his bank account, checking it at least twice a day. He always knows the most important financial indicators for his business such as order book, debtors days and work in progress. He developed these good basic habits because he started the business under such tight constraints. Even now that the business is growing rapidly and is profitable, he still sees it as a key part of his role as business leader, to know and respond to these indicators.
Trainiac now has over fifteen multinational clients with whom it does ongoing work and it has done over sixty projects. The company has a presence on two continents, Africa and North America, but it works for clients all over the world. Dennison moved out of the cottage in his backyard many years ago and he now houses his workforce of approximately 20 people in an office in Rosebank.
Dennison believes that as a small agile company, with a pioneering spirit and an innovative approach, Trainiac is well equipped to deal with the current slowdown in the economy. “As long as we keep doing good stuff, adding value to our clients and being creative, there is no reason why we should take big a hit,” he says.