When they lost their jobs, they went to work for themselves
Megan Graves never got a pink slip but nonetheless her job evaporated with the outbreak of COVID-19.
Graves had a commission-based job taking measurements and writing bids for large-scale home remodeling projects. In March, she was busy following up on leads from a statewide home show when COVID-19 began to sweep the country.
“Most people were really excited about getting things done,” and had even gone so far as refinancing their homes to fund the work, Graves says. “Then the pandemic hit, and nobody was committing. Most of them said it was because of the coronavirus because they needed to save funds just in case. The weirdest one said they needed to save time to find toilet paper.”
Graves still technically had a job, but no income—and plenty of time on her hands. So she and a coworker, Jason Barlow, began offering to install high-quality garden boxes for their neighbors via Facebook’s marketplace. Two months later, their budding project became Nature Built Designs, a landscape design company with five employees installing garden boxes, planters, and even picnic tables across Utah.
“I never thought I would do something like this,” Graves says. “I always considered entrepreneurs to be risky people, and I would avoid dating entrepreneurs because I didn’t want a risky life. So it’s kind of ironic that I’ve become an entrepreneur.”
As job losses skyrocketed and unemployment claims backed up, hundreds of scrappy Utahns scrambled to turn hobbies and side-hustles into full-time work—offering hand-sewn masks, home-baked bread, and expert yard care. Some turn to entrepreneurship out of necessity; others, with nothing left to lose, found themselves free to pursue life-long ambitions.
Nearly half of current Fortune 500 companies, including Airbnb, FedEx, and GE were founded during the height of an economic recession, according to Larry Jacob, vice president of public affairs at the Kauffman Foundation, which studies factors for entrepreneurial success.
According to Sara Moreira, an assistant professor at Northwestern University’s Kellog School of Management who has studied long-term outcomes for businesses created during lean times, businesses started during difficult times differ substantially from those created during economic booms. They are typically more resourceful, more resilient, and more productive than those created when cash is flush.
But, there’s an unexpected downside to creating a business during a recession, Moreira says recession-born businesses grow more slowly, and generate far fewer jobs than their comparable counterparts. And given that scrappy recession survivors are more likely to turn a profit, she says, it’s not clear why.
“That’s the surprising pattern in the data,” she says. “Whatever businesses enter during recession… they don’t seem to be able to overcome that.
““That’s the surprising pattern in the data. Whatever businesses enter during recession… they don’t seem to be able to overcome that”
When people lose their jobs they start businesses
As has happened with recessions in the past, Jim Herrin, director of the Salt Lake Region Small Business Development Center, said his office experienced an uptick in clients who wanted to start small businesses when COVID-19 broke out.
“Many people are realizing that starting a business is a viable alternative to finding a job,” he says, “Especially when there are not many jobs available, and especially when they have an expertise or a skill they can build around.”
Like Graves, many of these people will start e-commerce ventures, selling whatever they can on platforms such as Facebook, Amazon, and Etsy. Professionals like lawyers, social workers, and doctors, Herrin says, are another common class of recession-inspired entrepreneurs; many have come to the SBDC seeking to open an independent practice.
Some will buck the trend to become surprising success stories—Herrin recalled a former client during the Great Recession who found success selling CDs of old Spanish music. Most, however, will not succeed. Failure rates are so high among these impromptu entrepreneurs that despite the ground-level influx of interest at the SBDC, most will never register in high-level data.
There are two basic measures for tracking business creation: government registration at the state or federal level and job creation. To show up on most statistician’s radar, Moreira says, a business needs to employ at least one person apart from the owner. Few recession-born companies will achieve this milestone. As a result, official data typically shows a reduction in business creation during downturns.
In 2008, The Great Recession saw business creation drop 25 percent, Moreira says. So far, business creation has declined 20 percent in 2020, according to a report from the Economic Innovation Group, which also notes that business creation had yet to return to pre-2008 levels.
Companies created during recessions will also hire, on average, five percent fewer employees than businesses created during better economic conditions, Moreira says. So between the lower number of startups that actually create jobs, and the slower growth those that do experience, overall job creation decreases 30 percent during a recession.
And this time around, Jacob notes, job creation is declining at a much more rapid clip than during the recessions of the past.
Often, those companies stay small even after a recession ends
While there is no conclusive research to explain why recession startups hire fewer employees than companies started in more prosperous times, Moreira has a few theories.
One theory, she says, is that companies enter the marketplace with lower expectations during a recession. Take, for example, a restaurant. A new diner that opens during a recession might choose a location with a smaller kitchen, assuming a smaller customer base. Even when business picks up, it can be difficult to expand to serve a larger clientele. “That can affect businesses in the long run,” Moreira says. “Even if you want to double your capacity, you may not do that because it requires investment.”
COVID-19 could have an even greater impact on this front because the pandemic itself forced many startups to reduce their capacity. Angelina Tsu, a lawyer by trade, was in the process of opening a fitness studio called Salt Lake Lagree when COVID-19 broke out. She had planned to open anyway, but one of her trainers was exposed to the virus, forcing her to postpone.
She opted to forge ahead anyway, but new requirements from the health department that gyms must maintain 10 feet of distance between patrons at all times forced her to limit the capacity of her classes to just nine participants at a time. This may represent a change of plans, but Tsu sees it as a possible opportunity—the capacity of all gyms has been reduced, which means Salt Lake City will need more gyms.
“There are still opportunities out there,” she says. “You just have to be a little more thoughtful in your planning.”
In addition to physical or societal limits on how large their companies can grow, Moreira suspects that the kind of person who turns to entrepreneurship during a recession is fundamentally different from those who start a company in boom times. Most, she says, are not dreamers like Tsu, but rather entrepreneurs of necessity—people who need to make ends meet when unemployment runs out, and for whom there are no obvious job prospects on the horizon.
“They don’t have the ambition to become a large-scale corporation,” Moreira says. “They don’t grow at a faster pace because that’s not the goal. The goal is to create enough income to survive.” And while some entrepreneurs of necessity do become dreamers and founders, “that’s more the exception. Most successful companies are started by entrepreneurs who from the moment they started had very big ambitions.”
For some, becoming a solopreneur is the new normal
For those who do have big ambitions, Moreira says, recessions create opportunities, and COVID-19 perhaps even more than most. When the market takes a shock, as it did during the pandemic, customer expectations and needs change rapidly. Larger companies, she says, often aren’t sufficiently nimble to pivot as quickly as these shifts require.
Take yard care, a significant opportunity at the moment. Moreira herself says before the pandemic, she never imagined herself owning a sandbox. Now she has one, and she’s looking to buy a whole backyard playground for her children because she’s still nervous about going to the park.
Paul Wolford, cofounder of Lawn Fungus Fix, has experienced a similar effect. He and his partner began working to commercialize a lawn care product developed at Utah State University late last year. They considered postponing their launch date until after the economy recovered—but he said they’re glad they didn’t. They had hoped to make $5,000 in their first month in business; instead, they made $10,000.
Wolford says he now plans to quit his full-time job as soon as Lawn Fungus Fix makes enough to pay a full-time salary. “It ended up being a really good time to start,” Wolford said. “I think since a lot of companies were slowing down and there were some holes in the market, we were able to fill some of those holes and treat lawns.”
Running a business isn’t something everyone will enjoy doing, Drake says—business owners on average report greater day-to-day stress than employees. Most who start businesses out of necessity will return to full-time employment as soon as the job market improves, regardless of whether they succeed in supporting themselves with their venture.
But a handful, she says, will discover they prefer the flexibility and independence that comes with running their own business. “None of us know what it’s going to be like in three or four months, but entrepreneurs are more willing to jump out and take risks,” she says. “They’ll work the extra hours, or do whatever they need to reach out to people. So I think entrepreneurs will be very successful right now because they know how to change with the times. To them, this is like a great big bowl of ice cream.”
Even reluctant furniture designer, Graves has begun to catch the bug. Already she said she’s begun to plan how to grow her business when garden season subsides, transitioning from garden planters to offerings such as outdoor picnic tables. She’s begun to work on plans for a company website and has the beginnings of a long-ranging vision in the works.
“The goal is to make it a social venture company, actually,” she says. “My goal would be, that for every purchase of garden boxes, a little bit would go toward a nonprofit. Maybe we could put the funds toward community gardens.”