This Year Not as Bad for Startups as Formerly Thought

On the face of it, 2010 looks like a bad time to start a new business. Early stage capital, whether it is venture funds, angel investors or bank loans, remains tight. And while technically the recession has passed, consumers and businesses are still keeping a tight hand on their wallets. Despite the obstacles, however, start-up formation has increased recently, possibly due to laid-off workers deciding to pursue their entrepreneurial dreams. At the same time, high unemployment has expanded the talent pool for start-ups looking to hire. For those who can find creative solutions to the financing challenge, starting a new business now may turn out to be perfect timing. “The recession is a great time to start a company,” says David Wessels, an adjunct professor of finance at Wharton.

In fact, the numbers show that the pace of start-up formation has picked up despite — or even because of — the recession. According to a report released in May by the Ewing Marion Kauffman Foundation, a non-profit focused on entrepreneurship, the number of new businesses created between 2007 and 2009 was the highest level in 14 years, even exceeding the start-up boom of 1999-2000. In 2009, 340 adults out of every 100,000 started a business each month, up 4% from the pace in 2008.

The uptick in entrepreneurial activity might seem “counterintuitive to some,” says Thom Ruhe, director of entrepreneurship at Kauffman. “But the economic situation of the last few years has shattered the image of job security and economic stability. And it is a natural progression for some people to see entrepreneurship as an avenue for economic determination. People are saying, ‘I will control my own destiny.’”

Yet if more people are willing to make that leap to start their own business, the challenges in keeping that enterprise alive are steep. Angel investments, funds from wealthy individuals that are a source of capital for many start-ups, fell sharply in the wake of the 2008 financial crisis. According to the Center for Venture Research at the University of New Hampshire, angel investing declined 8.3% in 2009 to $17.6 billion, a drop that came on the heels of a 26.2% falloff in 2008. Because deals were slightly smaller in size last year, however, there was actually a 3% increase in the total number of firms that got financing.

At the same time, 2009 saw angels put a greater share of their money into later stage firms, with just 35% going to start-ups. That’s down from 45% going to seed-stage companies in 2008. “We need start-up capital,” notes Jeffrey Sohl, director of the Center for New Venture Research. “If that [35%] figure stays low, then we have problems.”

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