Why start a new business in a recession? Why not?

Starting a business during a downturn can be nerve-wracking, but some of the most famous brands were launched during an economic downturn. Airbnb and Uber began trading during the global financial crisis of 2008; Burger King opened in 1953 when the US was in recession, while Hewlett-Packard was founded in a Palo Alto garage in 1939 during the Great Depression. As the R-word threatens 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 Unconventional Mindsets of Entrepreneurs That Can Help Anyone Change the World“, there are three main reasons.

He says: “First, during or in anticipation of an economic downturn, as we see today, large companies cut costs and waver in their ambitions, which means less innovation and less competition for others who are innovating. Second, many of the resources a startup needs, people, real estate, etc., are becoming more abundant and cheaper. Third, entrepreneurs with great business ideas are probably more likely to think, why not try this good idea?’

That was the motivation behind entrepreneur David Davis’ decision to start Sovereign Beverage Company during the global recession of 2008. He had spotted a gap in the market about a year earlier while visiting breweries as part of his full-time job and realized, that many have an untapped sales route in the form of global exports.

He says: “Why launch at the start of a global recession? My first thought was why not? If I could get the business to thrive I knew it would be strong and sustainable and 15 years later it has proven to be the case.”

Although the venture was challenged by a lack of cash flow and resources, it eventually developed a sustainable business model. “We don’t hold stock, we sell before we buy and we pay before we get paid,” Davis says. “We have also chosen to work with product suppliers from several different breweries, allowing us to offer a wider range of global customers while maintaining the logistics of a single supplier.”

There were advantages to their time. The breweries they worked with were struggling and looking for new ways to increase sales. Sovereign Beverage Company offered them a new, risk-free stream of sales revenue. From there, the company focused on finding customers in markets less affected by the financial crisis.

“The recession forced us to develop a very slick and efficient operation that we still follow today,” Davis says. “For that reason, I would definitely do it again. Questions have been asked about our decision to start trading during a recession, but I think it was the best time to start.’

2008 was also the year Konrad Bergström founded the Swedish technology giant Zound Industries. Zound transforms Jim Marshall’s famous rock ‘n’ roll amplifiers – used by Jimi Hendrix at Woodstock – into a range of home speakers and headphones sold in 130 countries.

Before that, he set up the lifestyle distribution business Megascene Agency and led 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 backs on him and having to sleep in his car with his dog, he believed better things were ahead. Not even the recession could dent his faith in Zound and its potential to disrupt the market.

“It’s easy to think doom and gloom when the economy crashes,” he says. “What I saw was a tremendous opportunity to create a simple, finely tuned business and position it for long-term success.”

The lack of external funding in the form of investments, bank loans and government funding for start-ups was a significant challenge. “We found solutions in adapting payment terms, attracting and leveraging distribution rights and getting family and friends to invest,” he says. “Establishing distribution through companies that have survived and are still aggressive was also key, but required a lot more planning because the market was less forgiving.”

With a recession looking increasingly likely, Bergstrom’s advice to other entrepreneurs considering starting up is to keep a positive mindset and focus on working with the facts. “So many people think of the recession as a hellscape,” he says. “It’s an opportunity and you have to really believe in it to succeed.”

John Mullins agrees that such mindsets are vital to increasing an entrepreneur’s chances of success in adverse start-up conditions, allowing them to break many of the conventional rules by which established businesses operate and encouraging them to focus on narrowly defined objectives markets with insurmountable problems to solve.

He says: “Big companies tend to overlook opportunities that won’t ‘move the needle’. Entrepreneurs “borrow” underutilized assets owned by others rather than investing their own money, at least until market demand is proven. They ask their customers to pay up front and use that money to fund the growth of their business by paying their suppliers long after the product has been created and delivered.”

Finally, he adds, right-thinking entrepreneurs don’t ask for permission. Faced with legal or other ambiguities, they persist, thinking they will ask for forgiveness later if they have to. “If Uber’s founders had sought permission from San Francisco’s taxi regulators, Uber, and perhaps the rest of the gig economy, might not exist today,” Mullins adds.

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