Saturday, September 23, 2023

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

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Shreya Christina
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Starting a business during a recession can be nerve-wracking, but some of the most well-known brands have launched during an economic crisis. Airbnb and Uber started trading during the 2008 global financial crisis; Burger King opened its doors in 1953 when the US was in a recession, while Hewlett-Packard was founded in 1939 during the Great Depression in a garage in Palo Alto. With the R-word threatening to resurface, the key question is why?

According to John Mullinsassociate professor of management practice at London Business School and author of ‘Breaking the rules! The six counter-conventional entrepreneurial mindsets that can help anyone change the world‘, there are three main reasons.

He says: “First, during or ahead of economic downturns, as we see today, large companies are cutting costs and delivering on their ambitions, which means less innovation and less competition for others to innovate. 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 more likely to think, why not give that great idea a try?”

That was the reason behind entrepreneur David Davies’ decision to launch Sovereign Beverage Company during the global recession of 2008. He had noticed a gap in the market about a year earlier when he visited breweries as part of his full-time job and realized that many had an untapped route for sales in the form of global exports.

He says: “Why start at the beginning of a global recession? My first thought was why not? If I could make the business prosper, I knew it would be strong and sustainable, and 15 years later it has proven that.”

Although the company was challenged by a lack of cash flow and resources, it eventually developed a sustainable business model. “We don’t hold inventory, we sell before we buy and we pay before we get paid,” says Davies. “We have also chosen to work with suppliers of products from different breweries, which allows us to offer a wider range to global customers while keeping the logistics with one supplier.”

There were benefits to their timing. The breweries they worked with were struggling and looking for new ways to increase sales. Sovereign Beverage Company offered them a new risk-free income stream. 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, which we still follow today,” says Davies. “For that reason I would absolutely do it again. Questions were raised about our decision to trade during a recession, but I felt it was the best time to start.”

2008 was also the year in which Konrad Bergström founded the Swedish tech giant Sin Industries. Zound transformed the famous Jim Marshall 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 had founded the lifestyle distribution company Megascene Agency and brought international brands such as Quiksilver and Burton to success in Scandinavia. But in 2004, Bergström had to file for bankruptcy. Despite huge debts, business associates 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 affect his faith in Zound and his potential to disrupt the market.

“It’s easy to think of doom and gloom when the economy plummets,” he says. “What I saw was a huge opportunity to create a lean, finely tuned company and position it for long-term success.”

A lack of external financing in the form of investments, bank loans and start-up funding from the government has been a major challenge. “We found solutions by adjusting payment terms, holding and using distribution rights, and getting family and friends to invest,” he says. “Establishing distribution through companies that survived and were still aggressive was also key, but required a lot more planning as the market was less forgiving.”

With a recession becoming increasingly likely, Bergström advises other entrepreneurs considering starting out to keep a positive attitude and focus on working with facts. “So many people think of a recession as a hellish landscape,” he says. “It’s an opportunity, and you really have to believe that to succeed.”

John Mullins agrees that such a mindset is essential to increasing an entrepreneur’s chances of success in adverse start-up conditions, allowing him to break many of the conventional rules by which established companies operate and encouraging them to focus on accurate defined target markets with compelling problems to solve.

He says: “Large companies tend to ignore opportunities that ‘won’t move the needle’. Entrepreneurs ‘borrow’ underutilized assets owned by others rather than invest 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, paying their suppliers long after the product is built and delivered.

After all, he adds, entrepreneurs with the right mindset don’t ask permission. In case of legal or other ambiguities, they continue, assuming that they will beg 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,” added Mullins.

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