Jul 25, 2022 | Starting a Business

A recession is coming. Is now a bad time to start a business?

Q. Dear Zenagos, I’ve had an idea to start a company for a while, and I want to do it now. But my friends keep saying I should just negotiate for a better salary at my current job because it’s a great job market and a recession is coming. Is now a bad time to start a business?
–Lynsey

People who tell you that they know the best time to start a business don’t know what they are talking about. Even famous economists and established researchers acknowledge that the future of labor markets is unpredictable (Habib & Hasan, 2021; Shigapova et al, 2015; Addison, 2014). It can be difficult to start a business during a recession if you need to acquire capital, since capital markets are typically tighter when business conditions are challenging (Hovakimian, 2011). However, a business may only need one two investors, so the conditions of the overall market may or may not be relevant. Once you have your investment dollars in the bank, you won’t really care if the rest of the market is struggling!

There are countless examples of successful businesses that launched during tough financial times. In fact, many entrepreneurs swear that they were successful precisely because they launched during a recession (Inc, 2018). Competitors who are borderline performers are often weeded out during recessions, while a newly built business has an operating model designed to function in that particular time. As the country emerges from a recession, customers hungry for a change may flock to a shiny new option. So, don’t let your friends discourage you with this logical-sounding economic argument. They are just guessing about the future, like everyone else. If they could predict the future, they’d already be billionaires.

If you are wondering whether to start your own business, ignore the naysayers and put your energy into making a marketing plan and then testing your ideas. If you have a clear strategy for how you will acquire customers at a reasonable cost, then you can test that concept in the market to see if it works in practice. If your idea works, then it works (at least for now), regardless of the overall economy. Taking some concrete steps to validate your idea can build your conviction and give you the confidence you need to make the leap into entrepreneurship.

Ironically, aspiring entrepreneurs tell us that their friends and family (who should be their most stalwart supporters) are often their biggest naysayers, trying to discourage them from launching a business. Perhaps these friends and family see the idea of starting a business as unrealistic, and they want to help their loved one avoid disappointment. They may consider it their job to look out for their people and prevent big mistakes. Regardless, you don’t need to own their opinion. Your job is to make a responsible plan for launching your business. Obviously, you should consider whether you would do better if you stayed in your current job, and you shouldn’t take a big risk if you cannot afford to take a chance. But, you can make that evaluation for yourself.

To increase your probability of success, build relationships with real business experts whom you can trust and ask for their help avoiding common pitfalls. The best friend you can have when you are new to running your own business is someone who has been there and done that and can keep pointing out new opportunities as you grow.

References

Addison, J. T., Portugal, P., & Varejão, J. (2014). Labor demand research: Toward a better match between better theory and better data. Labour Economics, 30, 4–11.
Habib, A., & Hasan, M. M. (2021). Business strategy and labor investment efficiency. International Review of Finance, 21(1), 58-96.
Hovakimian, G. (2011). Financial constraints and investment efficiency: Internal capital allocation across the business cycle. Journal of Financial Intermediation, 20(2), 264-283.
Nobody loves a recession. But many successful entrepreneurs say that, in retrospect, they were lucky to have launched their businesses in tough times. (2008, May). Inc. 30(5), 89-95.
Shigapova, D., Valiullin, M., Yrieva, O., & Safina, L. (2015). The methods of prediction of demand on the labor market. Procedia Economics and Finance, 23, 1476-1479.

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