Economic Recession - best time to start a business?

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Posted on May 17, 2020
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According to an Inc.com article, six iconic companies leaped out of terrible economic times:

  • Microsoft 1975
  • Apple 1975, 2001
  • Netflix 1997
  • Mailchimp 2001
  • Airbnb 2008
  • Warby Parker 2010

Will the economic slowdown brought by Covid-19 create a great opportunity for your venture?

We can attempt to answer this question through different lenses and angles, one of which is to study the availability of funding during tough economic times.

For this, we'll explore the Kaggle dataset available here. This dataset contains Crunchbase data about the startup ecosystem including organizations, acquisitions and IPOs and funding rounds.

Total Funding by State 1990 - 2013 (USD mln)

According to the data, California took lead in receiving the highest total amount of funding of approximately US$118 bln for the period 1990 to 2013, followed by Massachusetts with US$24 bln and New York with US$21 bln, Washington of US$13bln and Texas of US$11bln.

Total Funding by Vintage 1990 - 2013 (USD mln)

If you recall, Year 2000 and 2007 - 2009 marks the dot.com bubble and the global financial crisis. Surprisingly, total funding received by companies with vintage year 2000 was considered significant compared to vintage years 1997 to 1999, where as total funding received by companies with vintage year 2007 peaked for the period under analysis over just more than 2 decades. Funding slightly slowed down for companies with vintage year 2008 and beyond, either due to lower investor confidence or liquidity.

For the period 1999 to 2013, total funding received by software and cleantech represents 14.3% and 10.6% of total funding respectively. For the period 2007 to 2009, funding to software dropped considerably to representing only 9.5% while cleantech's funding increased to 14.8%. Funding seems to have remained opportunistic for healthcare related themes like biotech and cleantech even during economic downturn.

In terms of exits through IPO, although activity was limited for the years 2009 to 2010, valuations picked up for the years 2011 to 2013. There's a possibility that a couple years after economic recessions poses good opportunities for IPO valuations and exits.

Although IPO activity/valuations may have slowed down, acquisitions remain active across slow economic years, with valuations increasing steadily for the period 2005 to 2013. This may be due to acquisitions made by larger companies at relatively lower valuations and consolidations across market while economic activities slow down.

The dataset contains other information such as individuals, company news, relationships and key founders, etc. Below are further suggestions for exploration:

  • Mapping of network effect created by serial entrepreneurs or college alumni networks
  • Clustering venture capital funds based on their existing investments to streamline on targets for capital

Conclusion

There's no direct evidence that economic recession poses direct and significant risks to the access to funding. This dataset is limited to the activity around VCs, funding, exits and network and may not tell the other side of the story. There are also other factors which may prove beneficial to starting a company during an economic recession:

  • huge availability of talent with corporate layoffs
  • less competition with slower overall economic activity
  • bargains and negotiation power

Why not give it a try?

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About Author

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Deborah Leong

Deborah is a data scientist with 10+ years of domain expertise in Asset Management. She's a Certified Public Accountant with acute acumen for financial data analysis and an avid painter with natural intuition in pattern recognition. She believes...
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