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Entrepreneurs and Recessions: Do Downturns Matter?
Entrepreneurs and Recessions:
Do Downturns Matter?
By: Paul S. Kedrosky
Senior Fellow
Ewing Marion Kauffman Foundation
INTRODUCTION
The relationship between company success and economic conditions at the time of a company’s founding is ill-understood. Do weak economic conditions at the start lead to fewer companies founded? Do weak conditions lead to fewer successful companies? Do companies founded in better economic times fare better than those founded during recessions? The answers to these questions are important because of the central role that entrepreneurial ventures play in our economy, from job creation, to innovation, to improvements in our overall standard of living and GDP.
RESEARCH QUESTION
To what extent is a company’s founding date—with a particular focus on company cohorts from weak economic periods—related to its eventual financial success?
BACKGROUND
A cross-section of successful public companies were founded during recessions, including such recent examples as Genentech, Microsoft, Southwest Airlines, Genzyme, and many others. And prominent companies being founded during a recession are not just a recent phenomenon, with Morgan Stanley, Allstate, Krispy Kreme, and Knoll, among others, all able to trace their founding dates to the Great Depression.
This is an exceedingly complex issue, however, given the dearth of data and the level of granularity required. Nevertheless, at a high level we essentially are concerned with the relationship between the supply of companies (“births”) by founding period, and the outcome achieved by those date-based founding cohorts over time.
To deal with this supply aspect, a few broad points can be made. The first is what we might call the scarcity argument. It says that fewer companies are founded during difficult economic times, so we can expect disproportionately fewer successful companies to emerge from that economically constrained population. Why might we expect fewer companies founded during recessions, for example? There are several reasons. First, entrepreneurs might decide to delay creating companies until the economy into which they anticipate selling products or services is more robust. This argument applies most strongly to entrepreneurs in service industries where there is little lag time from company founding until first
ANALYSIS
The attached graph shows the number of companies that went public per founding year across each expansionary and recessionary economic period (which are marked with gray bars). Note that the y-axis scale is logarithmic.
CONCLUSION
The relationship between when a company is founded and its eventual success is little-explored, but interesting and important. Should we expect fewer companies of lasting significance to be founded during economic downturns? Or, should we expect that tough economic times produce quality companies in similar numbers as other periods? The answers to these questions touch on issues in policy, economics, and entrepreneurship research.
To download the report and read the rest of the study and its conclusions, go to: http://www.kauffman.org/uploadedFiles/entrepreneurs_and_recessions.pdf
04/20/2009 03:21 PM - 405 - 04/20/2009 11:22 AM |
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