Home / news / Opportunity or disaster … Can a successful startup be established amid a global economic recession?

Opportunity or disaster … Can a successful startup be established amid a global economic recession?

What common factor can be between the “General Motors” engine manufacturer, founded in 1908, and the “CNN” media station, which was founded in 1980? And between Apple and Microsoft technology, which were founded in the early seventies? And between uber ride-hailing and Airbnb rental properties, both of which were founded in 2008? At first glance, the answer would seem that the common thing between these companies is that they are all giants in different specialties. But in reality there is another element in common, which is that all of these companies were founded in the midst of a violent recession that toppled thousands of companies in different periods of time.

History tells us that although economic recession is the worst thing that can happen to companies in most fields, and that in most cases it necessarily means death certificates for thousands of businesses and the worsening of economic conditions, at the same time, he always waved a glimmer of hope for emerging companies that they have an opportunity. To weather the storm, and at times completely game-changer. (1)

In June 2020, the World Bank announced that the global economy is expected to contract by 5.2% in light of the spread of the Corona pandemic, and that the economies of developed countries may witness a contraction of up to 7%, which is considered the worst economic performance in the world since the end of the World War The second in 1945.

As for the United States, it was already officially classified by entering the Recession in May, with the unemployment rate rising to a record high of 22 million, although it declined slightly in the following months of the year. In Britain, the Bank of England predicted in the summer of 2020 that the country would experience its worst economic recession since 1706 (more than 314 years ago) with a contraction of 14%.

In Asia, the World Bank has issued a report in which it is expected that the Corona pandemic will cause the worst economic growth in Southeast Asia and China in more than 50 years, with a growth rate of only 0.9%, which is the lowest growth rate in the region since 1967. It is also expected that Growth in China is up to 2% this year, and the rest of East Asia and the Pacific will contract by 3.5%. These numbers could push 38 million people in this region down to the poverty line.

At the level of the Middle East and North Africa, according to the World Bank report, economic activity in the region is expected to witness a contraction of 4.2% due to the aftershocks of the Corona pandemic and the developments in oil markets. (2, 3, 4, 5)

Over the months that followed the announcement of the Corona pandemic, and the global economy entered the recession stage, the startup sector was one of the sectors most affected, to the point that it was considered a mass extent event for startups, according to the Global Startup Ecosystem Report, which He sheds light on the implications of the crisis the pandemic has caused on the startup level.

Between a sharp collapse in the rates of venture financing for emerging companies, a decline in spending rates, and the layoffs of large numbers of regular employees, and between problems in management, operation and expansion plans, and not the end of a complete recession in certain industries, especially the tourism and travel sectors, the pandemic has led to nightmare situations For most of the emerging companies in the whole world, including the Arab region, which is what we previously reported separately. (6)

On the other hand, one of the main aftershocks of this recession has been the massive rise in the rate of new company formation after millions of employees have been shed around the world. In the United States, which is one of the most affected countries in the world, statistics say that the country has witnessed a surge in applications to establish new companies at a significant rate compared to previous years. For example, the fortieth week of 2020 – i.e. the first week of October 2020 – witnessed more than 91,000 requests to establish a new commercial company, which means an increase of 39% from the same period compared to last year. (7)

This phenomenon – the phenomenon of establishing commercial companies in the midst of an economic recession – is called by economists “necessity entrepreneurship”. With massive waves of formal job layoffs and high unemployment rates, the primary alternative – and perhaps the only one in light of low employment rates – is for millions to resort to starting a commercial company that provides them with new sources of income.

Forced entrepreneurship is usually the first choice for people who have had pending business ideas that they have not tested before given that they already have regular jobs that generate a steady income that enables them to postpone the implementation of these business ideas indefinitely. In times of economic recession, this group is the most inclined to start a business after losing a job or threatening their job security directly or indirectly.

On the other hand, the concept of “forced” for others represents seizing the opportunity to establish companies that the market is hungry for under the weight of economic recession, and working to meet the requirements of the new market in light of the crisis even if he does not have enough experience to meet them, such as the prevalence of small companies that appeared to manufacture masks and condoms At the beginning of the spread of the pandemic, and what followed it in terms of a major boom in financing companies specialized in the fields of health, medicine and tele-education, as they are the most urgent areas to meet in the time of the pandemic and cannot be dispensed with in any way. (1, 8)

In his article on the global business website Forbes, the serial entrepreneur, John Greenhouse, took a different approach to reviewing the impact of the recession, focusing on what economists describe as the “positive side” of it for companies and startups.

Flexibility: One of the most prominent characteristics that are considered a clear opportunity for startups and small businesses during an economic recession is the possibility to move quickly and with much greater flexibility, while large companies struggle to restructure and organize themselves over a long period of time to adapt to the crisis. The small company here is like a fast-moving dolphin, that can change course faster and easier, while the big whale takes a long time and a lot of effort to change its tracks and adapt to the new reality.

Creating opportunities: Economic recession creates more problems, and often the primary goal of small startups is to focus on innovation and creativity to overcome these problems and provide effective solutions to them more quickly than large companies that need a long time to develop a product or service and study its suitability. Market and earnings and revenue alignments.

It is precisely this advantage – the focus of startups on innovation and creating solutions – that was the reason for the emergence of emerging technology companies that changed the equations of global markets, such as Microsoft and Apple, which emerged during a major recession in the seventies, which also led to the emergence of dozens of startups in Silicon Valley in The period of the global financial crisis 2008-2010, which later turned into huge global companies such as “Uber”, “Airbnb”, “WhatsApp” and others.

However, one of the most important “positive” of the recession for newly established companies is the reduction in costs, not only in terms of operations related to operation, but also in terms of lower recruitment costs, which leads to a significant increase in the company’s activity.

Lower costs: One of the most important advantages of establishing small businesses in periods of economic recession is the low prices of products and services, or at least they are not expected to increase during the crisis period. Thus, suppliers and retailers sell products and services at lower prices to move their inventory and reduce losses.

Even for loans and investments in commercial companies, interest rates are at their lowest levels to borrow money or open new lines of credit to finance operations at lower fees and rates, which makes this timing an opportunity for small and emerging company founders to reduce expenses in most operations, and focus more on developing service And the product and its marketing.

Ease of hiring competencies: With high unemployment rates as a result of the layoffs of millions of employees, the job market is filled with a large number of highly qualified employees who are looking for a new job opportunity in a company, or what John Greenhouse called “refugees from large companies”!

Small businesses are taking advantage of the economic recession to hire “refugees” who often accept less wages than they were available before the recession, just to secure a regular job. Consequently, it will be possible for emerging and small companies to appoint highly qualified people with great experience in their companies, in exchange for wages that were difficult for those competencies to accept in normal circumstances.

The same is true for looking for a partner with a lot of experience, as times of economic downturn are ideal for finding a good co-founder who has quit his job or has been laid off in turn and is looking for an opportunity to establish a business as an alternative to his regular job. (9, 10, 11)

With the fact that there are advantages for small and emerging companies that must be taken advantage of in light of the crisis, and the fact that small entities emerged during economic recession crises over the past decades that later turned into giant companies, the matter still carries with it many aspects of the risks and difficulties that these can go through. Companies, like thousands of others, have been shut down.

The lack of funding and the cash flow crisis resulting from the decline in market demand remain at the top of the risks faced by emerging companies that are established in the midst of an economic recession, and the main reason for this crisis is the decline of venture capital funds and individual investors to pump their money into new startups. With a blurry vision of the market in these circumstances, which leads to the overthrow of many emerging companies that operate in recession-hit markets, which is what happened already weeks after the Corona pandemic for most startups around the world.

However, the solution remains to overcome this obstacle by focusing start-ups on the new sectors generated by the economic recession to provide them with creative solutions, which facilitates their access to financing rounds as a priority over others during the crisis. (12, 13, 14)

In the end, all recessions end, even if you took with them thousands of victims from large, medium and small companies that were unable to cope adequately, but history has proven that these periods of economic recession were the cause of the end of traditional companies, and the beginning of other unconventional companies that took over the helm. After the crisis passed, it turned into poles in its markets.

____________________________________________________________________

Sources

  1. Why a recession can be a good time to start a business
  2. Corona plunges the global economy into the throes of the worst recession since World War II
  3. World Bank says coronavirus to shrink 2020 global output by 5.2%
  4. Pandemic pushes US into official recession
  5. Bank of England warns of sharpest recession on record
  6. The black swan … how has the Corona pandemic affected emerging projects in the world and the Arab region?
  7. Business Formation Statistics
  8. Necessity Vs. Innovation-Based Entrepreneurs
  9. Recession Coming? 10 Reasons To Start A Company In A Downturn
  10. Top 8 Reasons to Start a Business in a Recession
  11. Top 10 Reasons to Start a Business in a Recession
  12. The Pros and Cons of Founding a Startup During a Recession
  13. Exploiting the pandemic … the most prosperous emerging sectors in the time of Corona
  14. Why a Recession is a Great Time to Launch a Startup




Source link

Leave a Reply