RICH MAGGIOTTO KNOWS what it’s like to start up during rough times. When the tech bubble burst in 2001, the San Francisco entrepreneur was at the helm of not just one but four fledgling companies.
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:
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.