The Economist - Starting Successful New Companies in the Downturn

Starting Successful New Companies In Recessions

Posted by: Michael Mandel on May 03

First, my apologies for disappearing for a bit. I was travelling, and then got otherwise distracted.

People have hypothesized that it’s easier to start companies during downturns, because labor, rent, and other resources are cheaper (in economic jargon, the ‘opportunity costs’ are lower). And there have been plenty of news articles talking about out-of-work professionals going into business for themselves.

But here’s a slightly different question—is it easier to start a successful company during a downturn? Not so obvious, is it? It might be easier to start a company, but harder to start a successful one if the economy is weak.

Take a look at the table below, which was put together by Gary Beach, publisher emeritus of CIO magazine. The table, based on the Fortune 500, shows what percentage of top companies were incorporated during a recession (Gary was using Wikipedia’s list of U.S. recessions, which goes back further than the NBER’s list of U.S. recessions).

	Based on Fortune 500				percentage that were incorporated into business
						during a recession year
	Top 10 companies						70%
	Top 25 companies						64%
	Top 50 companes						52%
	Top 100 companies						43%
	Top 500 companies						36%
	percentage of years that the U.S. has been in recession						39%
	Data: Gary Beach

By Gary’s count, the U.S. has been in recession for 39% of its years. Looking at the entire Fortune 500, 36% of them were incorporated into business during recession years, which is no great shakes.

But as we move up to the most successful companies—the ones at the top of the list—the situation changes. Among the top 10 companies, according to Gary, a full 70% were started during recession years.