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The Honolulu Advertiser
Posted on: Sunday, December 23, 2001

Out of economic doldrums come successful startups

By Jim Hopkins
USA Today

SAN FRANCISCO — Walt Disney lost an acting job as a movie extra and started his cartoon company in a Hollywood garage. The timing: the 1923-24 recession.

Last month, Ethan Diamond and Iain Lamb launched their San Francisco dot-com amid another recession. They had quit a tech company that took an unappealing turn.

Crazy? Not really. Sixteen of the 30 corporations in the Dow Jones industrial average trace their birth to recessions. Tech titans William Hewlett and David Packard joined forces in Silicon Valley in 1938 during the Depression. Bill Gates dropped out of Harvard to start Microsoft during the 1975 recession.

Contrary to popular wisdom, business startups soar when the economy sours.

That's because laid-off workers like Disney and restless employees like Diamond and Lamb, convinced they've got great ideas, pursue self-employment and benefit as startup costs tumble. That boosts the entire economy because small businesses create 75 percent of new jobs and usually lead the United States out of hard times.

"They're the single most important part of ... the recovery process," says Jeffry Timmons, an entrepreneurship professor at Babson College.

The recession startup boom was striking after the last recession. The share of all workers who were self-employed peaked at 7.7 percent during the 1990-91 downturn. About 246,000 people started ventures in those two years.

As the economy charged ahead, the self-employment rate fell almost every year after. It hit a 52-year low of 6.6 percent last year.

Experts predict that the recession that began in March will follow the same trend — and may produce even more startups than in past downturns. That's because the United States' entrepreneurial culture, already one of the world's strongest, was bolstered by several factors in recent decades.

Hundreds of university entrepreneurship programs began in the past 15 years, churning out more entrepreneurs. More women are starting companies. There's more money. Venture capitalists, who invest in startups on behalf of institutions and individuals, will pump more than $35 billion into startups this year. Even though third-quarter financing is off 73 percent from last year, 2001 will rank as the third-biggest ever for VC financing and 10 times greater than in 1990. Finally, tales of 18-year-old tech wizards becoming overnight multimillionaires continue to inspire.

"We're in the midst of an entrepreneurial revolution," says Robert Barbato, a professor at Rochester Institute of Technology.

Certainly, startups don't always take hold. About 40 percent survive to their fifth year. Unlike Disney, which has 120,000 employees, most remain tiny. About 61 percent of the nation's 5.6 million employers have fewer than five workers.

Still, hundreds of thousands of entrepreneurs ignore the long odds and start companies during recessions. They are driven by:

• Unbridled optimism. Disney, despite a rocky start, believed animation couldn't lose. Two years before starting work in his uncle's garage, Disney's first Laugh-O-gram Films venture went bust. Workers abandoned him, and he barely had enough to eat. Before he started Wal-Mart, Sam Walton lost his first five-and-dime, bought in the 1945 recession, when the landlord took his store back.

Entrepreneurs in the current recession have the same pit-bull tenacity. Robert Rankin started producing $7,500 golf course shelters last summer at Teetops in Marietta, Ga. He is convinced he can sell 350 next year — recession or not.

"I've always been an optimist," Rankin, 39, says. "The strong will survive."

• Little to lose. Unemployed workers don't have to give up big salaries to start companies. That reduces startup costs, says Barbato. For example, Louise Landrum started an executive coaching firm in Tempe, Ariz., in July when she couldn't find a human-resources job after getting a doctorate in psychology. She had blanketed the Southwest with 100 resumes after graduating in August 2000.

Landrum, 53, counsels chief executives on problems such as fear of flying. In business six months, her gross income this year will be no more than $6,000. Still, she sees a future. Landrum wants to keep her company small, with perhaps five other counselors sharing offices and support staff.

Jobless executives make good entrepreneurs. About 25 percent of laid-off managers older than 40 years old started companies in the late 1980s and early 1990s, Babson's Timmons says. Entrepreneurship could get the same boost this time. About 21 percent of the 331,000 jobs lost in November were in white-collar and other service professions — people ripe to start companies.

What's more, companies desperate to cut costs are losing many talented people. "A lot of layoffs are being done with axes and not scalpels," says Russell Skibsted of venture-capital firm Asset Management in Palo Alto, Calif.

• Dirt-cheap overhead. Labor isn't the only thing that gets discounted during recessions.

Goods also frequently cost less. That's what golf-shelter company Teetops learned in July. Rankin got a deal on shelters from an Atlanta-area factory at a 20 percent discount from the year before, he says.

Office and warehouse rents, too, often fall as vacancies climb. Nationwide, office vacancy rates have jumped to 11 percent from 7 percent a year ago, says building management firm Cushman & Wakefield. In San Francisco, where the dot-com implosion hit hard, the shift is even more dramatic — to 13.5 percent from 2.3 percent. Citywide rents crashed 31 percent, to $54 a square foot, in the third quarter.

San Francisco entrepreneurs Diamond, 30, and Lamb, 31, found even cheaper digs for their startup, called Oddpost — an under-heated storefront on a busy street where heavy trucks rumble by. Oddpost pays $24 a square foot, or $1,500 a month. Diamond and Lamb made a table from plywood and sawhorses, hung sheets to partition the room and painted the walls themselves. Total cost: $500. "The key was being frugal," Lamb says with a smile.

GV Financial Advisors in Atlanta wrangled a similar deal in the last recession. In February 1991, Chief Executive Officer David Geller found an office building that was 80 percent vacant. The landlord gave Geller a "phenomenal deal" — a three-year lease at $12 a square foot, with a nearly $50,000 renovation allowance.

Geller, 42, says the recession helped: In tough times, clients need expert advice on investing. Today, GV Financial has about 60 employees and more than $7 million in annual revenue.

Women will play an even bigger role in the economic recovery this time than they did in 1990-91, experts say. Barbato, the Rochester Institute professor, expects to look back on the downturn and ask: "Did women entrepreneurs lead us out of this — more so than men?"

That is because hundreds of thousands of women, their resumes primed with management experience, are starting companies. Women own almost 40 percent of private companies — up from 5 percent in the 1970s. They created 70 percent of private-sector jobs in the 1990s.

The number of women-led companies will reach 6.2 million next year. That's up 14 percent from five years ago compared with 7 percent for all companies, says the Center for Women's Business Research.