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A downturn is a great time to start a company, the eternal optimists in the Bay State’s thriving startup economy will tell you.
Typically, these boosters cite cheap office space, an abundance of good talent, big-company layoffs and job uncertainty pushing nascent founders to take the plunge.
That sounds like great news for a jobs boost in Massachusetts. The only problem is, many would-be founders don’t agree.
New business formation in Massachusetts fell 12.2 percent during the most recent recession and 10.7 percent during the 2001 recession, according to the Secretary of the Commonwealth’s office, which tracked new incorporation filings through Dec. 31, 2009, by request for the Boston Business Journal.
New business starts are critical to a jobs recovery, U.S. Bureau of Labor Statistics economist Akbar Sadeghi said, because employment gains at newly established businesses are typically offset by losses in other sectors or businesses.
“It’s highly important to have a high rate of (company) birth, because these births will be the major employers of tomorrow,” Sadeghi said. “If you have a good base now, the continuing operation of (these companies) would create jobs in the future.”
Leonard Marro hopes to be part of that job creation. Last spring, the Long Island, N.Y., resident bought the assets of a bankrupt electronics-parts manufacturing company in Norwood, re-incorporated it under a modified name and invested in new manufacturing equipment. He now commutes weekly to Intronics Power Inc. (formerly Intronics), where he says he has 25 employees, all hired off the unemployment rolls.
“My whole thrust of this thing was no one gets employed here except the unemployed,” he said.
Despite the urban myth that says recessions breed entrepreneurs, many involved in the world of business formations say job uncertainty actually chills the entrepreneurial impulse. Would-be founders lack confidence in the economy’s long-term prospects and are unsure of regaining a place in the job market if their ventures should fail, say VCs and bankers that back small businesses.
That hasn’t bothered Wendy Troupe, who left a position at Fidelity Investments at the end of 2008 to explore entrepreneurial opportunities. Great Minds Interactive Inc., the tech startup she incorporated in July, now has a paid, two-month pilot contract with Cisco Systems for a social media tracking tool called Socialtality, she said. Revenue from that deal and potentially others will go toward developing the product, designed to measure social media impact and return on investment.
Troupe, who worked for 20 years at Fidelity developing new ideas internally in contract and full-time capacities, said in 2008 her job became tenuous.
“I always survived based on positioning myself in places where there was a need,” she said. “I think that for me I saw the writing was on the wall from a technology standpoint that it was going to be harder and harder for me to do what I was doing ... I needed to bank on something I could build myself.”
Those compelled to start a business may not get beyond first conversations with friends and family. That’s typically the first step, but in the current environment, rich uncles and aunts may not be so rich any more, said seed-stage investor Elon Boms, a managing director at Cambridge-based LaunchCapital LLC.
“We’re seeing a lot of entrepreneurs who are interested in creating a new business but are extremely tentative in making the leap,” Boms said. “A lot of companies are either looking to do things for less or shelving their ideas until 2010 or 2011 when things look better.”
The Massachusetts startup economy is full of optimists who think that’s already happening — including Shannon Jamieson, Jessica Manganello and Steven Shapiro. The three young Suffolk University Law School graduates incorporated New Leaf Legal LLC in November. The new firm serves startups exclusively.
However, some young hopes may be dashed. Kauffman Foundation senior analyst Dane Stangler said he’s looking for two other shoes to drop. Bad commercial real estate deals are yet to come due for the small banks that typically handle most loans to young companies, he said. And changes in regulations governing personal credit cards, which took effect this month, may result in a tightening on the personal lines of credit many entrepreneurs use to get started.
For now, though, Jamieson said the hurting job market has already created opportunities for New Leaf. “It’s given us the opportunity to work with people who would otherwise be in full-time jobs,” she said. “When you are your target market, it’s a lot easier.”
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