If you need to while away some time while on lockdown, here’s a quiz question. What do the following businesses have in common: IBM, Disney, Uber? The answer is simple – they were all founded during a deep recession. For a long time, economic historians have noticed that even when business conditions are at their toughest, a few smart entrepreneurs can still find a way to launch a new company. As the world goes into what may easily turn into the deepest downturn for 100 years or more, could that be true this time too?
Inspiration in adversity
The American economy was stuck in a deep slump when, in 1896, Herman Hollerith started the Tabulating Machine Company, which went on to become IBM – today it’s still a giant of the computing industry. The economy wasn’t in any better shape in 1923 when the Walt Disney Company was founded. In the mid-1970s, as the economy tanked, Bill Gates started Microsoft. Right after the financial crash, plenty of new businesses were formed. Uber was started in 2009. Airbnb raised its first round of investment that same year. Both went on to become two of the biggest online successes of the decade.
There is no great mystery here. Sure, in some ways it is tougher to start a business when demand is collapsing and confidence is low. Investors are more reluctant to back new ideas and consumers are more hesitant about trying out new things. However, because ideas are tested more robustly and there is so much less money available, the entrepreneurs are more resilient, and operations are leaner. In a recession there are often lots of very smart, hard-working people with time and limited opportunities elsewhere. When they start a company, it is often a good one that can last the distance.
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The coronavirus recession does not look a promising time to start. This is not a normal recession – we would all be a lot more cheerful if it were. With a potential quarterly drop of GDP of 30% or more, it will be the worst downturn we have ever seen. Even worse, the restrictions on movement and on opening up any kind of business premises mean it is an intensely difficult environment in which to operate.
But this doesn’t mean nothing can get off the ground. In the UK the government’s extraordinarily generous scheme to allow companies to grant leave of absence to staff who might otherwise be laid off means millions of people are going into lockdown in their homes. They will still be receiving most of their normal salary and will have plenty of time on their hands. A few might decide to use it by putting some idea together for a new product or service to launch once the world starts getting back to normal. And the explosion of the internet and app economy means it is easier than ever for entrepreneurs to launch a firm online. There is suddenly space for all kinds of new stuff to be delivered virtually and which, right now, people will be more willing than ever to pay for.
How to stoke a boom
The government should be looking for ways to encourage this. The rules on the job-retention scheme are being made up by the moment, so there is no reason they cannot be tweaked to allowed people who are kept at home, paid a salary, but not actually able to work for their normal employer, to work on a project for themselves without either HMRC or their boss cracking down on them. That way lots of new ideas might start to emerge while people would otherwise just be twiddling their thumbs.
Next, new companies as well as established ones should be able to access all the help the government is offering. They may not have staff yet, so there won’t be any salaries to support, but there is no reason why they shouldn’t be offered the same access to cheap loans. Finally, with all the tens of billions the government is throwing around to support the economy, perhaps a few hundred million, at least, could be set aside for a start-up fund to provide grants for anyone brave enough to launch a business in the face of this downturn. If nothing else, their guts would lift our spirits.
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