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Entrepreneurs Thrive When Economy Slips

Startups Can Rise Above a Weak Economy

By Michael Parduhn

This is the first in a series of articles that deals with issues related to starting a new business.

As the Lead Organizer of MIT’s $50K competition, I am often asked whether it is a good time to start a company. My answer is, “Yes!” Now is a great time to start a company.

We have just been through a time of extraordinary economic prosperity, when cash was plentiful and everyone and his brother was starting a company. The times of easy cash for any idea are over, but entrepreneurship is not dead. On the contrary, it is alive and kicking.

Some might doubt that now is a good time to start a company simply because we have a short memory for what constitutes “normal” economic conditions. We are currently in a time of economic uncertainty, and we are probably in a recession. Recent events have made everyone uncertain about what the future will hold. Even though we have had nine recessions since World War II, entrepreneurship has continued. We have seen times like this before, and we will see them again.

With that in mind, let’s look through history to see if there are any examples from which we can draw inspiration.

Would you start a company during a worldwide economic depression that was ongoing for the last ten years? Well, two guys named William R. Hewlett ’36 and David Packard decided to do just that. They founded Hewlett-Packard in 1939, after the Great Depression had been underway for a decade.

What about starting a company after your country had been devastated by war and was occupied by a foreign power? In September 1945, Masaru Ibuka started Sony in postwar Japan. Sony’s first product involved fixing and improving radios.

How about starting a company while interest rates are rising, the stock market had dropped 45 percent the previous year, and the country was suffering the aftermath of both a Presidential scandal and a war that it had just lost? Maybe you have heard of Paul Allen and Bill Gates. They decided in 1975 to start Microsoft, despite this dire situation. Or maybe you have heard of Robert Swanson and Herbert Boyer, who founded Genentech on April 7th, 1976, when the economy was doing even worse.

What is the common theme among these companies and their founders? A desire to build something great, despite what was happening in the rest of the world. They saw a need for a technology that they had the knowledge and ability to produce. These types of needs still exist today.

Did these people do this for the money? Probably not. They formed their companies because they saw a need that they could fill. And why do we know about these companies today? Because they succeeded in filling these needs, as well as the future needs that they found along the way. This contrasts with the speculation of the dot com boom, where a large number of people were in the business for the quick buck.

A measure of entrepreneurship that is often used is the amount of venture capital investment. According to Venture Wire, an online venture capital newswire, venture capital firms have invested $21.8 billion in companies this year. This is down from the $52.9 billion invested last year. However, putting this into historical perspective, only $10 million was raised in 1975. Even though there has been a 50 percent decrease in venture capital over the last year, there has still been a 2000 percent increase since the year Microsoft was founded.

The upshot is that you can still start a great company today, despite the economic downturn. Though money is not flowing as freely as during the dot com boom, that does not mean that you cannot create your own business. A company will have to be frugal and look for other sources of funding, but a great business can be started at any time.

Parduhn is a graduate student in the Alfred P. Sloan School of Management, and serves as the lead organizer for the $50K entrepreneurship competition.