Entrepreneurship seems to be the cure all for almost everything including the common cold. In a recent paper, the Kauffman Foundation found that the number of Fortune 500 companies and Inc 500 companies were founded in bear markets. A bear market is when stock prices are more or less falling and a bull market is one in which they are rising. Now this seems counter-intuitive at first. Would you not start a business when times are good? In bad times, if other firms are having trouble selling goods and services, why would you start another one? However, there is another aspect to this. If you lose your job you might have to start a business (a necessity entrepreneurship). But I do not think many of these would grow up to be Fortune 500 companies.
So how do we explain the Kauffman finding? Well, a quick look at bear and bull markets reveals a very interesting finding. Over the whole of the 20th century we found about three bear markets (the market rising) and about three bull markets (the market falling). Each is about 15 years, give or take a little. Keep in mind that a bear market does not mean recession. Recessions are short, but bear markets can last a very long time. In fact, the current bear market stated about 2001 so we are about halfway through if you take the more or less 15-year average. So it is not surprising if about half of businesses are started in bear markets. In fact, a quick look at the statistics suggests that the start-up rate of new firms is not very sensitive to recessions. They are around eight percent. They never fall by 50 percent and never rise by 50 percent.
So what does this finding tell us? Nothing I am afraid. It is business as usual. In good times and bad times Americans will start businesses. I would suggest that the creative class start-up rate is also very steady in the recession. The regional variation of this might also be very interesting.
June 16th, 2009 at 3:59 pm
I volunteer at SCORE (http://www.sfscore.org) and we usually see an up tick in requests for help during a recession. The usual up tick relates to people who have lost their job and want to start a consulting business (or whatever). It seems to track pretty well based on general volume of requests.
Maybe the thing that self regulates the number of actual ventures started during a recession, independent of desire to start, is access to capital. In a recession, capital is tight and therefore not as many companies can actually start. You would then expect that when capital is flowing that more companies would start. If the rate is the same, then maybe during a booming economy, there is just not enough people who want to take the risk since they have good jobs. I agree, more analysis is needed.
June 17th, 2009 at 9:27 am
Absolutely! Recessions remind workers that there is no true stability so why not take a risk and follow your dreams and visions; make them real. Win, lose or draw, it’s a better-lived life!