Another View: New companies thrive on tough economic times

By Mohan Sawhney

These are tough times for entrepreneurs. They’re finding that investors have all but disappeared and revenues are declining as customers cut back spending. Given woes in the capital markets and the economy, it might seem a very bad time to be starting a new company or trying to grow a startup business.

Yet, history suggests that difficult economic conditions may actually be the best of times for entrepreneurship. Like a lotus that thrives in a dirty swamp, some of the most innovative companies have emerged during deep recessions. And just as the lotus relies on the swamp for its nutrition, startup companies can actually benefit from difficult economic conditions. It was during the Great Depression of 1929 that companies like Motorola and Texas Instruments were founded.

It was during the 1982 recession that we saw the birth of the IBM PC. As the U.S. was again mired in recession in 2001, Apple launched its first retail store and introduced its revolutionary iPod digital music player.

Why are difficult economic times good times for startups and innovation? There are several reasons. First, when funding is easy to come by, as it was during the dot-com boom, many dubious business concepts get funded.

When you get too much money too fast, you end up spending it in foolish ways. And you don’t have as much pressure to make the business profitable, because you can always raise more money. Just as U.S. homeowners got into trouble when banks lent them more money than they should have and on more lenient terms than they should have, venture investors tend to pressure startup companies to accept more capital than they need, which can end up getting them into trouble in the long run.

Another reason that recessions are good for startups is that customers become more demanding about value for money. Startup companies are forced to ask themselves hard questions about what value they offer and why customers should do business with them. When a market is growing rapidly, it doesn’t take much to sell your products and services.

Finally, a recession often signals that the current technologies and business models are running out of steam, and that it is time for disruptive new technologies and innovative business models to take hold. For example, desktop computing grew out of the declining fortunes of mainframe computing.

Customer needs do not disappear in a recession. There is always room to innovate, and there is more room to innovate when the existing paradigm is looking tired.

The spirit of entrepreneurship lives on in times good and bad. Entrepreneurship may actually thrive in difficult economic times, because entrepreneurs need to be more disciplined, more focused, and less distracted by competition. If entrepreneurs can position themselves for the downturn, the same economic headwinds that are slowing them down can become the wind at their back.

Mohan Sawhney is a business professor at Northwestern University.