5 Reasons Startups Can Thrive in Recessions

Every day I hear stories about how the recession and financial crisis are creating havoc in the business world. Uncertainty and fear have taken over. There is constant discussion of layoffs, budget cuts, financing problems, purchase delays and decreased demand. This recession affects every industry and companies of all sizes.

For most entrepreneurs who are just starting during this tough economic environment, it doesn’t feel like the “best time to start a business,” as we always hear during a downturn. However, there are some advantages that small companies can leverage now to stay afloat and build a better foundation for growth.

Here are five advantages for small companies during this recession:

1. It’s easier to be frugal
It doesn’t take as much cash as it did just last year to create and grow a business. Almost everything is cheaper than it was just six months ago: rent, hardware, software, travel, staff, commodities, advertising, services. Prices are coming down and there are more free or cheap services than ever. It’s even cool to be frugal again. There is far less stigma in being  a virtual business that does not have a permanent office or full-time employees.

2. You can attract great people
If you are trying to grow your business and to do great things, you need great people at all levels of your organization. The good news is that it’s a lot easier to attract the best full-time employees and part-time contractors now than during the boom times. Layoffs and business challenges are no longer affecting just the bottom 10% of employees – the best and brightest are looking for opportunities and they are generally happier to work for less salary and equity than a year ago. It’s not much fun to work at many big companies right now, so your cool startup can look relatively promising.

3. Big companies are on defense
The economic challenges are drastically affecting large companies in ways that create opportunities for the little guys. When big companies cut back, they focus on their core businesses and typically delay new and innovative projects which are more risky. Who wants to champion a new and unproven business initiative when your company is struggling and your coworkers are getting laid off? The harder an industry is hit, the fewer things will get done by big companies. Smaller companies can strike now when the big guys can’t fight back.

4. Reaching your customers can be cheaper than ever
One of the biggest challenges in growing a small company is finding and converting new customers. The Web has opened up new ways to reach people and get your message across that don’t require traditional advertising and  promotion expense. If your crowd likes you, they will spread the word for you using very powerful Web-based social media tools like Facebook, Twitter, YouTube, forums, blogs, texting and more. (You do need a remarkably valuable product or service more than ever, so your fans can promote you to their friends.) Although social media marketing does not require advertising expense, it does require significant effort and commitment to foster relationships with your community. Smaller companies with passionate leaders can do this better than the big guys, in most cases.

5. Crisis creates change, change creates opportunity
Entrepreneurs and innovators often underestimate how long it takes for “the market” to actually change and adopt a new product or service, even when the new way is better than the old way. Guy Kawasaki talks about the “10X rule” for new products: your new product has to be at least 10X better than the old product for people to change what they are doing. In times like these, when our biggest institutions, plans and traditions are being challenged, an environment is created where change can happen more quickly. An acceleration in the “change factor” allows new things to move into the mainstream more quickly. That’s great news for startups, bad news for the old guard.

All of these factors are reasons why many great companies are created during downturns. Crisis and dislocation in the economy create opportunities for those who can be frugal, focused, and aggressive.