Wow…what a couple weeks we have seen on Wall Street. Starting with the bankruptcy of Lehman Brothers and now ending (hopefully) with the recently passed $700 billion government rescue plan. The events that have occurred have either never been seen before or are firsts since the great depression. In these uncertain times, I was thinking about what this means for someone who is considering starting their own business. There are pros and cons of starting a business in this environment…here are just some of the considerations I thought of:
- Little to No Capital: First, the tightening of credit across the entire market is going to limit entrepreneur’s ability to access capital. I have seen this in my business where energy companies we have formed are not able to borrow near as much as they were 6-12 months ago. This will especially affect those with unproven track records who are trying to borrow in asset light businesses. It will also make it very tough to start something without a well capitalized equity provider (you, a partner or institutional money). Basically, those without capital are at a huge disadvantage in this market because there is little to be found.
- Increased Opportunity: When the economy goes through processes like this, there often are numerous opportunities that arise for innovating people who are willing to take a chance. The U.S. is going to go through a process of de-leveraging itself over the next several years – quality assets will shake out and create golden opportunities.
- Recession: If one starts a business right now, they would be trying to sell their products and services in a market where consumers and businesses have been, and will likely continue, ratcheting back spending. Consumer confidence is significantly weakening which has a broad impact on the overall U.S. economy. Europe also appears heading for a slowdown. That is a tough market to get started in. The one flip side to this is that what follows recessions are periods of growth and expansion, and the business you started during the trough will be up and rolling by time the expansion phase rolls around.
- Lower Opportunity Cost: Another clear positive I see about the current market environment is that leaving one’s job could have become much less costly over the past 6 months. As companies curtail spending and growth slows it is likely that compensation in most industries will follow suit. The opportunity cost of leaving (i.e. the salary and bonus you leave behind when you start your business) is now much more palatable.
