Start-ups: In the Grip of a Slowdown (1/3)

5 December 2011 by Jinesh Parekh 1 comment

The pace of entrepreneurial activity is a key indicator of business optimism in a country and nowhere more so than in the U.S., which prides itself as a country where anyone can turn an idea into a money-making venture. The current economic slowdown which has gripped the nation, starting with the mortgage crisis back in 2008 has had its inevitable impact on entrepreneurs and the number of individual businesses which are being launched.

Here in a 3-part series, we look at what the uncertain economic environment is doing to the world of start-ups (especially those offering their services over the internet) and how they have incorporated outsourcing into their business model.

Start-ups: In the Grip of a Slowdown

The U.S. economy grew at 2% in the third quarter of 2011, better than the 1.3% growth seen in the second quarter but still below investor expectations. The downturn into which the world’s largest economy has been in, is expected to continue for some more time and the heat of this slow-down is being felt by start-ups – a barometer of entrepreneurial activity in the U.S.

Last month, Federal Reserve Bank of America’s President Dennis Lockhart, in a speech, asserted that the number of start-ups being incubated were lower than in previous years. With bank funding drying up as a consequence of the difficult credit climate, start-ups, which were important generators of jobs for the U.S. Economy, would have to look at alternate sources of finance for their ventures such as personal savings and private equity among others.

Citing data from the Bureau of Labour Statistics, Lockhart said that the number of new establishments decreased from a peak of about 870,000 a year in 2006 to 700,000 in 2009 and was 720,000 in 2010.

“Today we believe there are actually less start-ups than the potential – all because of the down economy,” says Dr. Jacques Bensimon, Chief Executive and Founder of Logtel, a company based in Israel offering training services for the telecoms market.

“Entrepreneurs are hesitant to start new companies and existing start-ups are hesitant to hire,” he says. Due to the depressed economic climate companies are hesitant to move rapidly, he added.

However, the flip-side of the slowdown is that entrepreneurs with innovative ideas are willing to take more risks and the harsh economic climate is leading to an explosive opportunity for niche markets, services and products.

Analysts say that in a downturn entrepreneurs, who want to launch their own start-ups especially in the technology space, would have to be canny and provide services and products which are not only recession-proof but offer quantifiable benefits to customers in terms of boosting productivity, reducing costs and adding value.

Chief Executive of Infosys – India’s No.2 outsourcer – S.D. Shibulal said recently at a conference, “Technology and business trends are changing at a breathtaking pace. The only way for enterprises to stay relevant in this environment of great uncertainty and great change is to focus on the customer and accelerate growth.”

This is especially true for start-ups who are attempting to sniff out opportunities in the current crisis and plug the gaps in the system.

Reaching Out for Credit

Since the genesis of the current economic crisis gripping the world lies in the financial and banking system , accessing funds is the number one priority and concern for start-ups, which are struggling to raise funds. Banks have become wary of lending to fledgling companies while investors in the form of venture capitalists and angel investors are exercising caution before committing funds to any enterprise. Remember, that the capital markets have yet to recover from the banking crisis of 2008.

Nati Katz, CEO and founder of NK Worldwide concurs. “The slowdown in the world affects start-up companies mainly through financials. Investors are more cautious prior to making capital commitment. In addition start-ups are also facing serious scarcity in credit offerings from banks.” NK is a U.S.-based public relations firm working with technology companies and hi-tech start-ups.

U.S.-based banks, struggling to survive after years of profligacy and mounting debts are trying to cut down on risky loans. An entrepreneur would have to have a credible and virtually fool-proof business model to induce lenders to part with money.

“Funding is almost impossible to get right now ,” says Evan Scharf, the CEO of SmallBiz Outsource, a start-up company providing outsourcing services in the U.S.

With traditional financial markets turning volatile and unattractive, investors are seeking new avenues such as private equity investments and bridge loans for start-ups but even this is difficult, he added.

“On the other hand, if you hit the jackpot idea and are surfing the right wave, you will find investors who are vying for the right opportunity to lay their gold nests,” he said.

Jinesh Parekh

Founder CEO, Idyllic.

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