It’s not all doom and gloom

In some ways at least, there’s never been a better time to launch a start-up, says Matthew Lynn. The government should help.

Walt Disney found cheer in a depression © Getty

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. 

Advertisement - Article continues below

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.  

Advertisement - Article continues below

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.  

Advertisement - Article continues below

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. 



Small business

Small business: how to chase late-paying customers

Many small business have trouble getting their customers to pay up on time. Here's what you can do about it.
23 Jan 2020

Beyond the Brexit talk, the British economy isn’t doing too badly

The political Brexit pantomime aside, Britain is in pretty good shape. With near-record employment, strong wage growth and modest inflation, there is …
17 Oct 2019
UK Economy

Post-Covid life will look remarkably similar to pre-Covid life

Everybody is speculating on how life will look once lockdown is lifted. My guess, says Merryn Somerset Webb, is much the same as it looked before the …
29 May 2020
Buy to let

The death of buy-to-let property is a useful cautionary tale for all investors

Investing in buy-to-let property was once a perfectly valid thing to do. But the government killed the market. John Stepek explains what investors sho…
29 May 2020

Most Popular

EU Economy

Here’s why investors should care about the EU’s plan to tackle Covid-19

The EU's €750bn rescue package makes a break-up of the eurozone much less likely. John Stepek explains why the scheme is such a big deal, and what it …
28 May 2020
Industrial metals

Governments’ money-printing mania bodes well for base metals

Money is being printed like there is no tomorrow. Much of it will be used to pay for infrastructure projects – and that will be good for metals, says …
27 May 2020

As full lockdown ends, what are the risks for investors?

In the UK and elsewhere, people are gradually being let off the leash as the lockdown begins to end. John Stepek looks at what risks remain for invest…
29 May 2020