It's been said that it makes sense to start a business when times are tough. The current spate of layoffs has led many businesses to rely on temps, contractors and other outside service providers, actually leading to a market opportunity for entrepreneurs. If they can carve out a piece of the market now and hang tough until conditions improve, they'll be poised for accelerated growth and profitability when economic conditions improve.
It seems a lot of people are thinking this way, according to a recent study by Challenger, Gray & Christmas, Inc., which puts the percentage of job-hunters creating their own opportunities as entrepreneurs at 8.7 percent in the second quarter of 2009.
"Confidence among entrepreneurs could be on the rise," the company says, with its Challenger Job Market Index rising to the 8.7 percent level, up from 6.4 percent in the first quarter of the year and more than double the 4.3 percent for the second quarter of 2008. In fact, the start-up rate last quarter was the highest since the third quarter of 2007, when 10.1 percent of job-seekers decided to create their own businesses. The index is based on a quarterly survey of approximately 3,000 job-hunters in a variety of industries across the United States.
According to John Challenger, CEO of Challenger, Gray & Christmas, certain market factors impede new business launches, which makes the current spike in entrepreneurship "remarkable." He notes that, "Credit is still extremely difficult to obtain and spending by businesses and consumers remains relatively meager." The fact that the economy seems to have stabilized, he continues, may have been the trigger for increased entrepreneurial activity.
What Challenger misses, though, is that some aspects of today's economy certainly favor start-up activity. For businesses with low barriers to entry, the long-term jobless recovery is likely to create non-traditional employment opportunities, which may be served by small services businesses -- from "single shingle" freelancers to small businesses -- as well as other forms of non-permanent employment.
Entrepreneurs who enter the market early will also be well-positioned to take advantage of an increase in private equity investment. The fact that there is more than $1 trillion in private equity capital waiting to be deployed, according to a report by Preqin, a London-based private equity research firm, suggests that continued stabilization will unleash considerable amounts of funding on a marketplace eager to receive investment capital.
Even though it may take a strong-willed individual to start a business in this climate, small business owners do see some promise. "Small business owners do not quite see the light at the end of the tunnel, but there is a sense that we have at least passed the halfway point," Challenger says. "Once banks are in a position to open the lending spigot again," he continues, "we are likely to see a surge in start-ups." This development would only be accelerated by the cash that private equity firms are waiting to put to work.
While it seems entrepreneurship is growing, the upward move in start-up activity hasn't made much of a dent in the number of self-employed workers that the U.S. government tracks. According to the Bureau of Labor Statistics, approximately 9.1 million people were self-employed -- down 500,000 year-over-year. Challenger, Gray & Christmas forecasts that start-up action won't reach the levels in the late 1980s and early 1990s -- the Challenger index reached an average of 16 percent annually from 1986 to 1992, hitting a peak of 20 percent in 1989.
Unlike the last period of entrepreneurship, today's developments are shaped by a workforce pushed into unemployment through perhaps the worst recession in 70 years. "We are surveying individuals who were forced into the labor market through job loss," Challenger explains. "As a result, these individuals are a little more averse to risk than those who voluntarily leave their employers to pursue entrepreneurial activities."
As a protracted period of high unemployment is unlikely to make conventional jobs an alternative for many of those looking for work, entrepreneurship has become an important option. The next bubble, it seems, is likely to come from an idea developed by a victim of the last one's collapse.