Tough times have historically been better for startup companies than most people think says Jim Verdonik in an article in Portland’s BizJournal online. Granted, entrepreneurs tend to see the glass “half full” more often than most people. But there are solid business reasons why new ventures flourish in the worst of times.
First, there’s necessity. Since many big companies have slashed their work forces, laid-off workers have to focus on starting over. Some of them are naturally going to want to be their own boss, or pursue that entrepreneurial opportunity they’ve been dreaming about for years. There’s less competition in the marketplace. Plus, talented people are easier to find and hire during a downturn.
Current market conditions are irrelevant to many new companies as well, since they often need 1-2 years of market research and product development before they’re even ready to launch. Since most downturns last less than two years, a new company starting now would be ready to launch just as the economy starts climbing again.
Then there’s ROI. Verdonik says venture capital investment return data over the past few decades shows that ROI is actually higher for investments made during poor economic times, versus boom periods.
That’s because ROI depends on valuations when the investment is made to the time of the exit date. Since valuations are usually lower during bad times, downturn investors start off with a substantial advantage which can result in higher exit ROIs. Call them value or vulture venture capitalists. Either way, they often produce higher returns.
One final bonus: during the good times when money is easy to get, companies tend to burn through it faster. Downturn companies tend to be more frugal and get a bigger bang for their buck. And downturn companies raise less money, because they spend less. Another reason they often provide better ROIs.
Comments on this entry are closed.