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Failure to Launch?

Conventional wisdom holds that recessions are hotbeds of entrepreneurial activity, but will this time be different?

American economic history brims with big-name companies that can trace their beginnings to a recession. Coors was founded during the recession of 1873. Bill Hewlett and Dave Packard cobbled together the prototypical garage start-up at the end of the Great Depression. Bill Gates, undeterred by stagflation, founded Microsoft in 1975. According to a recent report by the Ewing Marion Kauffman Foundation, an organization devoted to the study and promotion of entrepreneurship, more than half of the companies on the 2009 Fortune 500 list were founded during a recession or bear market, as were nearly half of the businesses on the 2008 Inc. 500 list of the fastest-growing companies in the United States.

While an economic downturn may seem an inauspicious moment to start a company, several factors often combine to produce opportunity. “The best time to start a business is when it’s hard to start a business,” says William Sahlman, a professor at Harvard Business School. In a recession, competition lessens as established companies struggle and fold, leaving room for new entrants. “You can make more progress during such periods and build a stronger position, without being competed to death by well-funded competitors,” says Sahlman. Rents tend to be lower, and high-quality talent is plentiful.

In addition, so-called opportunity entrepreneurs — people who have a new idea and try to capitalize on it — are joined by “necessity” entrepreneurs, says Dennis Ceru, an adjunct professor at Babson College. Finding themselves unemployed, some people who harbored an entrepreneurial dream but feared leaving the security of a full-time job may join with other laid-off workers who simply need to generate income.

But as would-be entrepreneurs face the Great Recession of 2008–2009, are the odds too heavily stacked against them? The credit and capital markets are at the epicenter of this downturn, limiting access to capital even for larger companies. Will great ideas remain just that, rather than blossoming into great companies? Or will those who would be kingpins simply have to be more creative and resourceful than before?

Dialing for Dollars

By all accounts, raising funds for a new business today is harder than it has been in decades. “There are no bank loans right now,” says Louis Katz, a partner with law firm Ruberto, Israel & Weiner and a former CPA who works with small and midsize businesses. “The SBA is starting to free up some money for new businesses, but that’s about the only place you see it. Private-equity firms are shoring up their existing companies rather than going out to find new businesses to finance.”

Sahlman agrees that “anything that requires bank financing is problematic,” but adds that he’s seen increased availability of equity capital in recent months. “It would be hard to start a $100 million project today, but there are lots of people funding things on the Web where it costs $250,000 to figure out if an idea is going to work, and if it works, it might be the next Facebook,” he says.

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