Stump the Slump
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Who in their right mind would want to start a business during a recession? Hey, it's not as crazy as you might think. Many entrepreneurs know that hidden among the recent deluge of stories of crashing revenues, lost contracts and layoffs are myriad opportunities. And they're determined to mine them.
"This isn't your parents' economy," says Steven Van Yoder, a marketing consultant in San Francisco and author of an upcoming self-published book tentatively titled Rise Above Recession: How to Recession-Proof Your Business to Thrive in Any Economy. "You need to learn from it and build a business that's going to withstand the new storm. Recession-proofing needs to be built right into the foundation of all businesses these days."
Working the Economy
The first thing your new company is going to need is a solid business plan. Not only can a business plan help you get a line of credit from your bank, but a solid plan also provides a clear path to revenue. Make sure you also include a few contingencies for tough times. (For more information about writing a business plan, visit www.entrepreneur.com/bizplan.)
Your plan should include data on your market size and geographic reach. If, for example, you plan to open a retail shop that sells baby products, you need to make sure there are a lot of young families in the area where your store will be located. Start with free data from the U.S. Census Bureau. Then check with your county and town governments as well as your local school district. You'll find a plethora of information on local family demographics. Even the bridal registries at local retailers can help you determine how many babies will likely be born in a given area.
As you consider the type of business you want to start, estimate how much it will cost to get the venture off the ground. During a recession, those with low startup costs-and no need for venture capital-typically do better. "Right now, there's very little appetite for outside capital because investors are worried about their own stock profiles," says Richard Geller, co-CEO, co-founder and chief marketing officer of Sponsera Corp. LLC, a McLean, Virginia, consulting firm that helps small businesses build alliances with large corporations.
It's important to keep necessary startup expenses low. That may mean starting the business in your home, buying used office furniture and leasing computers, which requires a lower initial cash outlay than purchasing. Hire as few people as possible. "I was a salesman by day, a proofer by night. I'd be the courier if need be," says Joe LaValla, 44, co-owner of Integrity Graphics Inc. in Windsor, Connecticut, referring to the early days of his printing company. "Instead of hiring people to do these things, we put in the hours and knew it was going to pay off in the future."
Of course, when the economy goes south, it takes more than hard work to get a company off the ground. It takes an understanding of changing business dynamics. In hard times, consumers decrease their spending on luxury items; businesses put off major purchases. And your company gets stuck in the middle if you don't position your products or services as must-haves. Companies that provide value-real or perceived-do well regardless of the economy. That list includes repair shops, consulting services and technology providers.
"The better times are, the more the dial moves toward luxury; the worse times are, the more [it] moves to necessity," says Rob Frankel, a branding consultant in Los Angeles. "If you're smart, your brand will take on more value to your users, to the point where they value it more as a necessity than it may be." If your product or service is well-branded, Frankel notes, consumers will be reluctant to part with it even if it's not truly a necessity. "That's the point of branding-to turn users into loyal users and evangelists."
Make Your Case
It's important to scale your offerings to fit the needs and budgets of your target customers. Consider what they need-or think they need-in the current market. Let's say you sell phone systems. Most companies will not invest in a new phone system if they're hurting financially. So why not sell replacement parts and reconditioned systems? You might even consider doing repairs.
If you plan to provide management consulting, offer several types of seminars at varying prices. You can also throw in a few freebies that cost you little but create lasting goodwill among clients. Advertise an introductory offer that will attract customers. Ongoing quality and service will keep them coming back.
"[This strategy] says, 'No matter what your budget is, I'm going to help you, and you're not going to walk away empty-handed,' " says Frankel. "If you have a menu that scales like that, it gives people a lot of choice, and they feel very comfortable. That's something very few businesses are doing. You need to scale offerings."
Market your new business aggressively-contrary to conventional wisdom, which says that marketing and advertising budgets should be tight in tough times. Because returns on those investments are often difficult to measure, many fledgling business owners view them as unnecessary expenditures.
"In tough times, you have to increase your investment in marketing, not decrease it," says Dwight Smith, 44-year-old owner of Sophisticated Systems Inc., a systems integration firm in Columbus, Ohio, and a member of the Greater Columbus Area Chamber of Commerce board of directors. "It's kind of like when you're in a car and you hit ice. Your natural tendency is to turn against the slide. But you've got to turn with the slide."
Put simply, you need to get your company's name in front of prospective clients. That means building a recognizable brand right from the start. Start by placing ads in the local newspaper or other publications read by your target market. Write articles about your industry, get quoted in industry publications or publish a newsletter. The point is to become an expert in your field, someone who will be around for the long haul- recession or no recession.
It's also a good idea to network. Join your local industry group or chamber of commerce, which typically provide excellent-and inexpensive-networking opportunities. You'll meet both prospective customers and business partners.
- Start the business in your home.
- Hire as few employees as possible.
- Offer employees flexible work arrangements or stock options in exchange for a lower salary.
- Buy used office furniture.
- Buy refurbished computers.
- Share office space with another company.
- Barter your products or services with those of another company.
- Check whether your local newspaper provides free business listings.
- Market your business at free networking meetings.
- Offer customers a free gift in return for referrals.
Stick to the Basics
During the heyday of the dotcoms, many businesses spent and spent and spent-with little attention to generating revenue. The mantra of the day was market share. The more you got, the more successful you would be.
Not so, says Davis. Anyone starting a business today must foresee a clear path to profitability. And they must build that path. "A company's right to exist is predicated on its return [on investment]," says Davis. "Some lose sight of that. I think we're back to business as usual. You have to have a real business model."
If you do, the rewards can be great. "Because there is more risk, there are more rewards today," says Stephen E. Roulac, CEO of The Roulac Group Inc., a global strategy and financial advisement firm in San Rafael, California. "If you do it right, you can get a better payoff."
EXPORTING:Some overseas markets are not suffering as much as the United States, says Don Graves, executive director of BusinessLINC, a Washington, DC, government-sponsored group that brings together small and large companies. "Everyone is feeling the pinch right now across the globe, but there are markets out there that small businesses need to take a look at," he says. The U.S. Office of Trade and Economic Development reported that in October 2001, exports were down 1 percent from 2000. Total export volume, however, stood at $697.7 billion-and some industries, such as agriculture, business services and chemicals, saw increases in export volume.
Canada, Germany, Japan, Mexico and the United Kingdom have traditionally been good markets for small companies, according to the SBA.
You can also learn more about starting an import/export business here.
CONSULTING:When the economy goes south, many large corporations lay off workers and outsource work-thereby saving money on benefits and such. "I think there's a slight tendency for consultants to do better in a recession," says Rob Frankel, a branding consultant in Los Angeles. "They can get the job done faster, and they don't have the costs that employees have." Business consultants who can help companies run more efficiently-and cheaply-will be in high demand.
You can also learn more about starting a consulting business here.
SECURITY:In addition to financial concerns, today's consumers are worried about terrorism and war. So any products that help them feel safer are bound to do well. "In describing a product's features and benefits, you might emphasize safety, as opposed to prestige," says Stephen Roulac of The Roulac Group. Popular consumer products might include security products and home alarms. Businesses will look for antivirus software programs, data backup systems and smoke alarms. Many will invest in disaster-recovery systems.
TECHNOLOGY:Technology products and services will remain hot, says Bob Davis, a venture partner at venture capital firm Highland Capital Partners in Lexington, Massachusetts. "There's a tremendous amount of opportunity there," he says, "particularly in high-speed networking, digital management and software that improves business productivity."
Michelle Marrinan is a Long Island, New York, writer specializing in small business, technology and e-commerce.