Ready to Rumble?

Still, this surge will be different from past ones, and savvy entrepreneurs are preparing for the changes. In previous recessions, layoffs from larger companies fell heavily on blue-collar workers, some of whom wound up starting their own firms and competing with existing entrepreneurs. This time, the pool of unemployed people contains many more white-collar workers, since the downturn hit professional fields such as IT industries particularly hard. More "of these people [who were] laid off are very skilled," says Paul Taylor, executive director of the Small Business Resource Center in Baltimore. These white-collar workers are more likely to have the education and capital needed to start successful companies. In fact, the "GEM" reports "the more education an American has, the more likely the person will pursue entrepreneurship." As a result, this surge may be the most competitive yet.

With competition tough, wise entrepreneurs are embracing outsourcing. Today it's easier to save money by outsourcing noncore tasks to other American companies, or even to overseas firms. Smart entrepreneurs are figuring out how they can best use outsourcing to compete as the economy recovers—they are putting up jobs for bid on the Internet, developing links to service providers in India and Southeast Asia, and researching other ways outsourcing can improve productivity. "Using the independents has been critical to our growth," says Ken Gaebler, founder of Walker Sands Communications, a small company based in Chicago that outsources computer programming to a company in the Ukraine and data processing to a firm in India. "Everyone I know is growing this way. It allows us to use people on a just-in-time basis and to bring in [exactly] the right person for the job," says Gaebler. "It also allows me to price more competitively. I can charge $60 to $80 an hour for work that competitors charge $200 to $250 an hour for, since they have to pay employees for time when they are not billable, and I don't."

Savvy entrepreneurs are also taking advantage of structural changes that hit larger companies during the downturn. Big "organizations are leaner, but they don't want to hire—so you do services for short-term dollars [for them], and you can make a killing," says Levinson. Indeed, some people laid off from large firms are using the contacts they had at their old firms in their new businesses. They're working as outside contractors for their old firms, which have committed to outsourcing and are unlikely to hire many staff back, even in a better economy. Paul Lorray, for example, worked for MCI/WorldCom, running a call center for 15 years before being laid off last year in the wake of the corporation's scandals. "The first thing that came to my mind when I left was to start my own business," he says. "The WorldCom experience really soured me" on large companies. Lorray decided to start his own firm, staffing it with former MCI/WorldCom co-workers. In July 2002, Lorray founded Argo Customer Solutions, a developer of customer support software applications in Sacramento, California. His firm projects solid sales growth. Says Lorray, "I don't regret for a minute having done this, because I've learned so much."

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Other entrepreneurs are preparing for the surge by expanding into export markets; a weaker dollar makes American exports cheaper and U.S. firms more competitive globally. In fact, Leslie Schweitzer, senior trade advisor for the U.S. Chamber of Commerce, says entrepreneurs have been one of the biggest driving forces behind American companies' strong export growth in recent months. Free trade deals recently signed between the United States and Singapore, and proposed deals between the United States and Central America, will only make it easier for small companies to export.

To take advantage of the surge, entrepreneurs are also spending on branding to establish their companies in the minds of consumers who are just beginning to spend again. Entrepreneurs can't be reckless with money as they were in the late '90s-VCs today remain wary of backing any firm that burns its cash quickly. Still, Levinson says, as the economy begins to recover, people become more optimistic and "want to associate themselves with winning companies. If you can market yourself as winning, trumpeting it and boosting your self-image," he adds, consumers will be drawn to your firm. "Eight or nine months ago, I wouldn't have told companies to go out and say things are rosy" in their businesses to attract customers, because it was hard to believe things were going well for anyone. "Now, why keep it a secret if things are going well?" says Levinson. "You should broadcast it."

Joshua Kurlantzick is a writer in Washington, DC.

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