Starting a Small Business in a Bad Economy

Things have been a bit slower than usual over at the Community Business Partnership, a resource for small companies in Springfield, Va. As Barbara Wrigley, an executive at the partnership, guesstimates it, there's been a 10-to-15 percent drop in folks coming in for information about starting new businesses. "I feel like people are being a little more risk averse these days," Wrigley says.

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It's a natural reaction given all the scary economic headlines, but slowdowns don't have to be barriers to starting new enterprises, experts say. After all, Bill Gates and Paul Allen didn't wait for the recession to pass before launching Microsoft in 1975. And plenty of would-be entrepreneurs aren't waiting for today's economy to improve either: Of the approximately 3,000 job seekers—mostly managers and executives—surveyed by outplacement firm Challenger, Gray & Christmas, 7.2 percent said they were starting their own business in the first quarter of 2008. Last year's annual average was 8.1 percent. "The bottom line is anytime is the right time [to launch a venture] if the opportunity is correct and if you as the entrepreneur have correctly assessed and shaped the opportunity," says Dennis Ceru, who teaches graduate courses in entrepreneurship and business strategy at Boston University and Babson College.

Still, while starting a new business always comes with risk—about half of small businesses fail within the first five years, according to the U.S. Small Business Administration—periods of stagnation or recession can make a launch even tougher. Among the challenges facing many businesses today, for instance, are tighter lending standards, higher prices of energy and food, and weak consumer spending.

But depending on your kind of business and location, you could find reductions in costs. Suppliers may cut better deals, rents could be lower, and workers may be more willing to sign on for less. "When times are tough, people don't hold out for higher salaries," says Scott Shane, a professor at Case Western Reserve University and author of The Illusions of Entrepreneurship: The Costly Myths That Entrepreneurs, Investors, and Policy Makers Live By. "You could probably hire better people more cheaply starting out now than you could when things were booming."

Balance all the factors to evaluate whether the current business environment will work in your favor, Ceru says, and ask yourself if you have the appetite for risk and the fire in the belly you'll need as an entrepreneur. Of course, put your good business skills to work, too. Make sure you shape the opportunity and have a strong business model, a revenue model that assesses cost and what price the market is willing to bear, and a solid value proposition that is completely customer-centric, says Ceru, who also helms the consultancy Strategic Management Associates.

Market conditions didn't really concern Rufus Frost when he and Rory Strunk launched their sports-marketing company, Aura360, on Jan. 1, 2003. The Dow Jones industrial average had just finished down 16.8 percent for the year, and corporate America was trying to recover from accounting scandals. The economy was definitely not booming. But after working at a large sports-marketing firm for nearly 10 years, Frost says, it was time to take the leap. "I had an idea and a belief basically in myself that with the right people I could create a company that would prosper."

He wasn't among those who saw the move as risky. "During periods of a challenging market, it's not necessarily safer to be with the big companies, but that's the perception," he says. "By being small and agile and leading the company myself, I felt in some respects even safer. The big companies suddenly don't take any risks and retrench and bunker down, whereas the small start-ups are out reinventing models."

Frost and Strunk capitalized on existing relationships and were able to secure clients within a month of opening their shop in Portland, Maine. Today the roster of the company, which has 10 full-timers, includes Jeep, Men's Health magazine, and Red Bull. Frost's advice to those thinking of going solo: "If you have the idea and you have a vision for it, don't wait for the conditions to be just right or you'll probably end up waiting a long time," Frost says. "There is business out there; it's just who's going to get it, really."