15 businesses to start in a recession

• Darren Horrigan
• 19 November 2008
• Page 1 of 3 : single page

Photo credit: Killanoodle

The recession of 1923 to 24 plunged the United States into an economic quicksand that destroyed more than 10,000 businesses. Yet this was precisely the time that a man who lived by the creed ‘if you can dream it, you can do it’ risked everything to launch a small cartoon studio called Disney Brothers.

About 15 years later, doomsayers told two young electrical engineers they were sure to fail when they started their tiny electrical machine business during the Great Depression with $538 and one product. Undeterred, Bill Hewlett and Dave Packard got to work in a rented garage.

Fast forward to 1975. Oil prices are soaring, bankruptcies reach record levels and one-fifth of the US population becomes eligible for food stamps. As economists declare a recession, two childhood friends make the first sale of their computer programming language and Microsoft is born.

Despite today’s financial turmoil – which The Washington Post reports “may be the greatest destruction of wealth the world has ever seen” – maverick business people like Walt Disney, Dave Packard and Bill Gates are once again ignoring the squawks of the Chicken Littles and giving life to their dreams. And not just through blind faith. History reveals that difficult economic periods are great times to launch new businesses. Sixteen of the 30 companies that comprise the Dow Jones Industrial Average started during recessions.

True entrepreneurs like to zig when everyone else is zagging. They believe a recession is more a state of mind than an economic reality. For Professor Ian Harper, specialist adviser at Access Economics and chairman of the Australian Fair Pay Commission, it’s both. When the economy slows, he says, there is less money around and it becomes harder for businesses to sustain high overheads.

“As large businesses faced with high fixed costs try to reduce their variable costs, they reduce their activity, creating space for small businesses to move into,” he says.

“As the tide goes out the small guys can still swim but the big guys get beached. Recessions create opportunities for small businesses primarily because they operate with low overheads.”

Back to basics

Why is an economic downturn a great time to start a business? Firstly, it’s cheap. Commercial rents, equipment, supply and labour costs tend to fall, making it easier to minimise start-up costs.

Entrepreneurs with sound ideas are more likely to raise funds from risk-averse lenders. Less activity during an economic squeeze allows an entrepreneur more time to concentrate on getting the basics of the business right before launch. It’s also an opportunity to experience the business at a measured pace before orders start flooding in. This includes having management and accounting systems in place, solid marketing materials and a well- designed website.

Established competitors with high overheads may suffer, giving new entrants an opportunity to poach equipment, staff and business. Downturns usually wipe out badly run businesses, leaving opportunities for those that operate efficiently.

New business ideas are always welcome, providing they offer a break with the past. Many dynamic new businesses are created in hard times. For example, budget airlines were launched amid tough trading conditions and a demand for more value. There is always space for ideas that cut costs.

Long-time McKinsey management consultant Matthew Brown says the people who made fortunes in the Great Depression had a different mindset.

“The Great Depression millionaires knew there was always money to be made,” Brown says. “Prior to the fall they reduced their expenses and saved. When everything crashed, they knew people still needed to buy things; that money would still change hands. So they moved in. And it’s happening again now.

“While many will suffer during this downturn, there will be others who make a tremendous amount of money. They have been positioning themselves all along to take advantage of this downturn.”

Harper says in a recession, small businesses must be willing to consider alternative markets for their product or service and alternative ways to get there.

“In these circumstances, small businesses have to be aware that the opportunities are likely to be among their fellow small businesses,” he says. “And the beauty of the internet is that it links small businesses together in ways that are far more effective than the traditional hierarchy in large organisations.

“Your instinct might say that small businesses are going to do it tough in a recession, but the exact opposite could be true. You have to be resourceful, imaginative and well-connected to be able to unearth opportunities in difficult economic times.”

Follow the money

One general guide to success is how segments of the market have performed in past recessions. According to Standard & Poor’s, in the 11 recessions since World War II, there have been few places for investors to hide. However, three industries posted positive returns: tobacco, household products and alcoholic beverages.

Mick Stevens would add another industry to the recession-resistant list: gambling. The former horseracing analyst for one of Australia’s biggest bookmakers decided to strike out on his own 12 months ago during the initial stages of the sharemarket’s wobbles.

Stevens reckoned there was a ready and growing audience for his expertise among investors who were happy to swap the risk of the stock exchange for that of the racetrack. For a daily, weekly, monthly or annual fee, Stevens sells his analysis and knowledge of thoroughbred racing, which is delivered via SMS, email or secure log-in to his web site. And business is brisk.

“Many of my clients are racing people but many others are refugee investors from the sharemarket,” says Stevens. “They understand that a horse race is just another type of market driven by a herd mentality and ripe for exploitation. Like any stock picker, we seek the best value and we bet accordingly.”

Similar thinking leads some entrepreneurs to seek those who have enough money to be recession-proof or target areas where people always spend.

The rich are not only getting richer, they are also becoming more plentiful. According to the World Wealth Report 2008 from Merrill Lynch and Capgemini, the number of high-net-worth individuals (those with more than US$1 million) increased 6% while the number of ultra-high-net-worth individuals (those with more than US$30 million) increased by 8.8%.

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Pre-loved merchandise has come a long way from the greasy pawn shops of yesteryear and becomes particularly appealing in tougher economic times when people get more conscious about their spending.