How I Started A Business During the Recession – And What I’m Looking Out For Now
Joshua Davidson wrote this article
I was sixteen when the Great Recession of 2009 hit the global economy in full force.
Growing up just outside of Atlantic City, New Jersey, I can’t recall another time period in my life that was so bleak for so many. I’d hear about my friend’s parents’ losing their homes or jobs, and saw the local businesses shuttering their doors. My own father worked three jobs to keep things going for my family.
But it was also during this time that I started my company ChopDawg.com, which began as a website design service for local businesses. I’ve now been in business for almost ten years, and we’ve evolved into something that is almost unrecognizable from its past self.
Trust me, this is a very good thing,
So how did I create a business during the recession? Well, I had to start small – very small.
You may have heard the expression “buying into the dip”.
We usually think of this in terms of investing – for example, recessions offer an opportunity to take advantage of buying cheap stocks that were once expensive.
But to me, “buying into the dip” is such a more expansive term which covers a lot more than that. There are a few reasons that I was able to “buy into the dip” and start a business during the Great Recession:
ChopDawg.com had zero upstart costs, with no need for any credit to get started. No loans, just $10 for the domain name. I picked a service that only required my own time and labor and that’s basically it. Not needing credit was a big deal for me, and I didn’t even think about this at the time. Recessions really dry up one’s ability to get a line of credit or an investment. Entrepreneurs and small businesses are always affected first. It’s hard to get credit when you are unproven or cash poor because the banks are hurting themselves and investors have already lost a lot of money.
I was also selling a service that was priced at just the right rock-bottom level to fill a need. Local small businesses desperately needed more sales, since so many had cut their spending due to the recession. A website could give these businesses a new way to reach their customers, new and old.
The timing was just right. From an economic standpoint, the Great Recession was an opportunity to trailblaze if you were selling the right thing at the right cost. During a major economic decline, the pool gets way less crowded. Potentials competitors become much more averse to risk, but for those who have an in-demand service, and the means to provide it, you are in business.
Back in 2009, website design had not yet become a commodity service. Offering web design as a service for small businesses was a novel idea, and many mom-and-pop shops didn’t know they needed it yet.
Which brings me to this: if you can solve a fresh-out-of-the-recession pain point at the right price, you have a chance of buying into the dip and helping a lot of people at the same time.
It’s during recessions when people’s priorities drastically change at scale
During a recession, consumer spending goes way down.
This makes sense because when you’re strapped for cash, you’re going to spend less money overall. But consumers are still spending money somewhere; they’re just spending it where they feel it makes the most difference in their lives.
During a recession, the consumer tends to place greater emphasis on their needs, not the nice-to-haves.
What you sell and your own expertise needs to evolve accordingly. I think this is why smartphone applications really came out of the recession, and its use spread like wildfire. People were going out less, and apps become an affordable option that could help them lead more enriching lives. And all this could be done at scale for the consumer.
Always remember that it’s people that drive the economy. When they decide to hit the brakes on spending, where are their priorities shifting to? In 2009 people were starting to become more discretionary with their purchases; using search engines like Google to do their own curation. When money is tight, people want to do their research to find the very best deal.
There were a lot of startups that had their beginnings between 2008-2009 as a result of these shifting priorities and needs…
Timing is one of the most important aspects of whether your startup will succeed or thrive. Timing can depend on where society is going, it can depend on whether or not the technology is available to solve previous problems, it can depend on how much people are willing to spend on something, the list goes on.
I’m going to list a few companies that were born out of the Great Recession and saw great success and write my thoughts on why:
CardCash, founded in 2009 by Elliot Bohm and Marc Ackerman, spawned from a problem that really fits into the fabric of the Great Recession when you think about. After one holiday season, the founders were left with several unused gift cards that they would have rather used as cold, hard cash. CardCash allows you to resell your gift cards to the company and then they sell them back to new customers for a profit. I really think this business model’s timing was just right because cash-strapped people could sell gift cards that they received as gifts for real cash.
On the other side of the coin, cash-strapped people who needed to buy something from a specific store could purchase the re-sold gift cards at a discount compared to if they just went straight to the store.
Startups have one the hardest times getting funding when hit with a recession.
At the same time, a lack of available jobs has more people becoming inclined to think about entrepreneurship as a new path. But without available funding, whether its an investment, a loan or a line revolving credit, it’s hard to get started. Not impossible, as I was able to get started with $10, BUT that doesn’t work for everyone. I founded a deliberately small-scale business that I could do entirely myself. That doesn’t work for some businesses. Furthermore, small businesses that may need credit or loans to expand their businesses were also faced with obstacles.
So this where a company like Kabbage, which provides funding directly to small businesses and consumers through an automated lending platform, came into the picture. Founded in 2009 by Rob Frohwein, Marc Gorlin, and Kathryn Petralia, this company really couldn’t have come in at a better time. Kabbage launched formally and made its first loans in May 2011. The Great Recession left a funding hole for small businesses, and Kabbage came in and created a market for them.
During the Great Recession, something else also happened: a confluence of technological and social advances that launched hundreds of startups in the mobile app space. In late 2008, a reluctant Steve Jobs had been persuaded by some of his employees to allow other companies to develop apps for the iPhone. The explosive growth of Facebook had caused people to create their own online. This would lay the groundwork for new startups to rise once the panic died down and investors were ready to throw money at things again.
With the rise of the App Store came the likes of Uber and Airbnb. The timing worked out right where those companies spotted trends and took advantage of a bad economy by offering gig jobs. Think of homeowners too who could now rent out rooms to pay off their mortgages. Think of the jobless who could now drive with Uber to help pay the rent and their cars. And once the investors were ready and saw the growing demand for these services, these companies had used the darkest points of the Great Recession to build out their infrastructure. They were ready because their timing was just right. They were early into the app market.
If what you are selling your customer doesn’t create a unique, lasting value over time, you’re offering a commodity.
With commodities, it doesn’t matter who made it. Customers who don’t feel any kind of personal connection with your product will flock to the cheaper alternative when it rolls around. Sometimes, you can adapt your product or service so that it’s no longer considered a commodity. Other times, you’ll simply need to abandon what you’re selling and move onto something else.
I cannot emphasize enough how important your ability to adapt to changes in market demand is. Figuring out who your customers are in the first place is one of the greatest skills you can have.
Make sure you are keeping a watchful eye on the economy’s vitals, while ALSO keeping an eye on how you may need to adapt your offering to the change times. Here are some recommendations I have for you:
Keep an eye on the Federal Reserve is slowly raising the interest rates in the money they lend to banks. That rings some alarm bells in my mind. Since the crash, the Federal Reserve has kept interest rates artificially low. But now, they’re starting to creep back up. I’m also specifically looking out for the flattening of the U.S. yield curve.
Historically, it’s so far one of the most accurate economic indicators when a recession is coming.
It depends on the dip, but usually, when the yield curve flattens and then inverts it means that within eight months to two years, something is going to happen. I’m not going to get too much into the woods of explaining the yield curve here, but it’s something I highly recommend you to research further!
Keep a close proximity to your customers – talk to them about their current needs and how they may be changing. What would your customers do in a recession? When times are tough, is what you are selling an accessory or a necessity? Do you rely on one group of customers? If so, think about who else could use what you are selling. Start to understand your demographics so that you can predict how they’ll react if a recession happens. It also goes back to what I was saying about being a commodity – make sure you are selling something that your customers would really miss if they didn’t have it. You may need to adapt what you are selling to change with the times, so don’t get too fixated.
Startups tend to either save too much cash or spend way too much I’ve found.
I would say for startups to do two things – build up your cash reserves so if there is a sudden drop in demand for what you’re selling, you can make sure that your team is protected. Give yourself that rainy day fund so that you have some runway to work with while you figure out your next move.
That being said, now is the time to get more credit if you need it to expand because the market will dry up once the market crashes. Credit isn’t going to get any cheaper than it is now, and so if the timing is right to get a revolving line of credit, for example, it’s now. But that does not give you an excuse to act irresponsibly. Only take on more credit if you can properly use it for leverage. You can run a lean business while also using lots of capital for leverage, just make sure that you aren’t burning cash.
So how are you protecting your business for the next recession? I would love to know what you are doing! Let’s start a conversion below in the comments. And if you haven’t started preparing, well, it’s never too early to start.