Starting Up: Launching in Tough Times

From smSmallBiz

He and his partner were tweaking their diverse business models — their concepts included an online pizza ordering system and an education venture — when the technology-rich Nasdaq Composite Index shaved almost 3,000 points from its peak. And just as the companies began to launch, the U.S. entered a recession.

While Maggiotto ultimately was forced to pull the plug on two companies, the downturn forced him to be strategic, nimble and more shrewd with money. Among other measures, the management team took pay cuts and moved to cheaper offices. "Every initiative had to be justified, and every hire was like hiring 10 people," he says. "It was all about ROI [return on investment], ROI, ROI." But thanks to those recession-inspired practices, his company NetOyster, an investment fund, made it though the worst of times and another, online publisher Zinio, is downright thriving.

The "R" word can be intimidating to aspiring entrepreneurs. However, many small-business consultants and advisors agree that a recession may be an optimal time to get started, as downturns often present a number of opportunities not readily available when the economy is stronger.

Here are a few reasons to start up when the economy's down:

Cheaper Resources

Getting started during a recession can mean picking up a raft of resources on the cheap, says Alice Bredin, a small business advisor to American Express OPEN in Cambridge, Mass. For instance, as office vacancy rates rise, rent and office equipment may become discounted. Labor also tends to be cheaper in downturns, she says, adding that as highly skilled workers increasingly lose their jobs, they may be willing to work for less.

Joe Ziznewski, who in April launched TriviaTown.com, a social-networking trivia web site, found that offering stock options in lieu of payment is also more acceptable right now. "As opposed to paying a graphic artist $30 an hour, we brought them in at $10 and offered stock options as well," he says. Another benefit of giving his employees equity in the business is that "they become more invested," he says. "Most of our part-time guys (including key developers and other key employees) are giving us 50 hours a week."

Better Business Practices

In addition to seeking out cost savings during a downturn, "you'll also be acting [more] prudently," Bredin says. She recommends establishing efficient billing and collections policies and making cost effective deals with vendors as well as being spare with marketing measures. In boom times, "if you wanted to attract customers by giving away cappuccinos, you did," she says. "However, in a downturn, you can't sustain that."

When Christopher Gergen co-founded online tutoring firm Smarthinking in Washington, in 1999, he was admittedly flush with cash. "The perception was that the money would be there when we wanted it," he says. However, a year later, funds all but dried up. As a result, "we limped through the summer of 2000," Gergen says. However, being in such dire straits did have its benefits. "We were able to pull our team together and morale actually increased," he says.

Bottom line, "entrepreneurs always need to be resourceful," says Gergen, who's written about business owners facing adversity in the book "Life Entrepreneurs." "But when you are seriously cash-constrained you are much, much better at managing cash." For example, bartering between businesses tends to increase during downturns, as do grass-roots or guerrilla-marketing campaigns.

Investor Appeal

Back when the dot-com bubble burst, venture capitalists were forced to retreat. But this economic downturn is different, says Simeon Simeonov, a technology partner at Polaris Venture Partners, a venture capital firm in Waltham, Mass.

During the previous recession, VCs and angel investors pulled their funds because they were overextended and too heavily invested in one type of business. This time, "we haven't run at the same mad pace," he says. "You are going to see VCs continue to invest capital." Plus, as equity markets turn sour, professional investors might be more interested than ever in packing money into a solid business venture.

When it comes to other sources of funding, little is expected to change during this economic downturn. While financial institutions have taken a hit as result of the credit crunch, newbie entrepreneurs with limited track records are rarely able to secure bank loans or lines of credit. Most turn to family or friends for help, or use personal savings or credit cards, says Bredin, the OPEN advisor. For that reason, bootstrapping will be just as popular as ever.

Retooling for a Recession

Perhaps the best way to deal with a recession is to cater to it.

After starting Zinio, Maggiotto figured the best way to grow his client base was to sign up publishers. As these potential customers were more interested in saving money at the time, "we refocused our pitch to the day's needs," he says.

Maggiotto zeroed in on the fact that Zinio could save manufacturing and distribution expenses by shipping online versions of magazines and books to a publication's subscribers. "Cost savings became the No. 1 reason to use us," he says. This value proposition, he adds, "resonated [with] hundreds of clients [that] came aboard at that time."

As the Maggiotto story illustrates, start-up entrepreneurs who can adapt as conditions change can weather a recession — and come out ahead. "The business owners who thrive during this environment get really, really good at this," says Gergen, the entrepreneur and author. "As a result, their enterprises become much more healthy."

Other recent Starting Up columns:

• Starting Up: Solo Health Care

• Starting Up: Getting Certified

("Starting Up," a weekly column written by Diana Ransom for smSmallBiz.com, follows entrepreneurs through the early stages of launching a business. Write to her at dransom@smartmoney.com .)