Recessionary Clouds and Silver Linings

Since 1955, Fortune magazine has published the Fortune 500, an annual ranking of the top 500 U.S. companies where revenues are publicly available. General Motors was #1 on the list in 1955 (see full list here), along with other names that have since fallen by the wayside e.g. Liebmann Breweries, Pocahontas Fuel, and Cuban-American Sugar. 

Today, as one looks at the Fortune 500, it is interesting to consider that more than 50% of the companies were founded during a recession or a bear market. In a recent study by the Ewing Marion Kauffman Foundation, “The Economic Future Just Happened”, it is revealed that an extraordinary 57% of the current Fortune 500 list of companies began during a recessionary period, or a bear market cycle. 

Additional findings of the study include:

• Recessions and bear markets do not appear to have a significantly negative impact on the formation and survival of new businesses.
• Job creation from start-ups is much less volatile and sensitive to downturns than job creation in the overall economy.

The report goes on to explore the reasons why stressful economic times might be fertile periods for the creation of new firms: 

• Rising unemployment, because it is often concentrated among large and established companies, can free up human capital.
• An unemployed individual with an entrepreneurial bent, and some measure of experience, may perceive a competitive opportunity to create a new company…as well as thinking there is nothing to lose.
• Entrepreneurs may target the unemployed as a potential pool of employees.
• The suppressed financial climate that surrounds a recessionary environment may be less relevant to a start-up company, than a less-new, growing company. 

In "Capitalism, Socialism and Democracy", Austrian economist Joseph Schumpeter coined the term "creative destruction" to describe the process of transformation and innovation...whereby innovative newcomers supplant the corporate behemoths. From the Kauffman study, one can intuit that the next generation of Fortune 500 companies was born during this recession. In 2008 and 2009, about one million new start-ups were founded. Some will fail. Others will shamble about. Many will prosper and flourish. A few hundred will show up on the Inc.500 in a few years, and a smaller number will be among the largest companies in 10-20 years. 

by Chris Holman