The Best of Times
Entrepreneurs tackle the recession
Charles Hamilton ’95, MBA ’04, spent the first three quarters of 2009
on a self-imposed sabbatical. As national unemployment numbers hit
a 15-year peak, the 36-year-old career entrepreneur cut timbers on his
family woodlot. He spent time with his children and reconnected with
his wife. He attended non-profit board meetings, trained for bicycle road
races, and sifted through the discoveries being generated by scientific
researchers on a quest for the seeds of his next business venture.
As summer slid toward autumn, Price Waterhouse Cooper
released stark statistics: In the first two quarters of 2009, venture
capital investments plummeted to just 40 percent of the previous
year’s first-half activity. Analysts forecast total investments for the
year at just $11 to $14 billion, levels last seen in 1996 and 1997.
Meanwhile, pundits catalogued early signs of what might prove
to be a recovery from the worst recession in a generation and
debated which letter — U, V, or W — might best approximate
the economy’s trajectory. One thing seemed fairly certain: the
nation’s return to financial vigor will take years.
— Scott Killips, MBA ’75, Preserve Capital Group
Gold from straw
In fact, startups hatched in tough times just might be the ticket to
economic recovery. Firms less than five years old accounted for all
net job growth in the quarter-century spanning 1980 – 2005, and in
“The Economic Future Just Happened,” the Ewing Marion Kauffman
Foundation notes that more than 50 percent of the companies on the
2009 Fortune 500 list trace their roots to a bear market — including
fast-food purveyor KFC, Microsoft, and Johnson & Johnson. Likewise,
nearly half of the firms on the 2008 Inc. list of America’s fastest-growing companies launched in a downturn. “The biggest opportunities
are in times of economic uncertainty,” says
Scott Killips, MBA ’75, a partner at the San Francisco
Bay Area venture capital firm, Preserve Capital Group,
which specializes in natural, organic, and green startups.
“Five years from now, we will look back on this as a
great time to have made investments.”
In their 20-page report “Entrepreneurship &
Innovation: The Keys to Global Economic Recovery”
released in June, Ernst & Young expand on that sentiment,
noting, “There’s no time like a downturn to take
advantage of entrepreneurial thinking.” “A large body of
academic research and real-world business experience has
established a clear connection between entrepreneurship,
innovation, and economic growth,” the authors write.
“By developing new products and services, revamping
organizational processes, or adopting fresh approaches
to partnerships, companies can take advantage of the
downturn to transform their businesses. Now is the
time for policy makers and business leaders to focus on
the long term – by identifying, supporting, and inspiring entrepreneurs
and innovators at all levels of the economy, in every market.”
Already, innovation and high-growth entrepreneurship feature in U.S.
President Barack Obama’s American Recovery and Reinvestment Act.
In May, New York State Governor David Paterson appointed Cornell
University President David Skorton to head a task force charged with
analyzing and recommending strategies to diversify the New York State
economy through industry - higher education partnerships. “Anything
the nation can do to stimulate high-growth businesses through venture
investments will be in the direction of increasing employment to the
maximum degree,” says David BenDaniel, the Don and Margi Berens
Professor of Entrepreneurship. “If you want to increase employment,
that’s where there should be a national stimulus.”
Brutal realities
Over the last two decades, Visiting Associate Professor of Clinical
Entrepreneurship Steven Gal has weathered macroeconomic peaks and
valleys, co-founded and grown six venture capital-backed companies, and
raised more than $100 million. The enterprise he rates most successful,
ID Analytics, Inc., launched at the bottom of the 2002 dot-com bust.
“We had a great time because there were a lot of people out there looking
for new things to do, and everything was cheaper – rent, equipment, even
people were willing to work for less because the alternatives were not
as great,” says the professor. Perhaps even more important, the rigors of
raising money in such an environment can hone and perfect a business plan to stand the tests of time. “The discipline you need to really nail the
business model in a down economy is much higher,” says Gal. “When I
raised money for my first company, I had to go through such a painful
process of fundraising, I had already dealt with some of the toughest
aspects of my business before I got outside capital. With the last company,
I was raising money even before I’d thought through the details.”
That last venture, a service to halt junk mail and connect consumers
with online promotions instead of their paper analogs, raised more
than $15 million and tanked in July, at the bottom of the recession,
as cash flow stalled and the environment for series C funding
evaporated. But don’t blame the economy, says Gal; he credits the
bust to leadership failures. “This was my idea,” he says. “I’m the one
who made all of the key decisions on where money was spent, what
we did.” While he managed to position his personal investments for
a downturn, he fooled himself into thinking it wouldn’t affect the
business, confident that as in recent years, the rising tide of outside
capital would lift all boats. “I thought … that I had some magical
ability to sidestep failure,” he says. “I still believe that there is a level
of planning, diligence, and discipline that I could have applied to
keep that company from auguring into the ground.”
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