Is it a good idea to start a new business in these tough economic times?

Simon Murdoch - 30 July 2010

There’s a lot of doom and gloom out there with talk of a possible double dip recession. Is now a sensible time to be starting a new business? Many people seem to think so – there are currently record numbers of what the media calls ‘bedroom entrepreneurs’, undeterred by the economic environment, who are setting up their own business. Those who have decided to make the leap may include you or people you know.

There are of course pros and cons. The most important consideration at any time is: have you got something which will sell and can ultimately make healthy profits? Many entrepreneurs are product led – they start in business because of a passion for a product or service without really understanding how to make money from it. Having set up and run several businesses, I have to admit I fell into this trap myself with the online language community I launched, FriendsAbroad - we never really worked out how to monetize the cost base effectively and eventually sold to a German competitor for a disappointing return.

Instead you should be market led: define the potential customer segments, their current problem and how much and why they will pay for your service. You won’t necessarily get this right first time but if you’re analytical and really listen to your customers and the market, over time you can evolve the business to a model which works for your customers and for you.

Assuming you have the basics right, now is a great time to be starting a new business. In the current climate, nearly everything is negotiable, so if you’re canny you can buy office space, marketing services, people, just about anything at better prices than before the banking crisis.

Of course, the flip side is true too, i.e. your customers will frequently negotiate hard with you. But if you really have defined an innovative service with tangible customer benefits and relevant competitive advantages, then you can still make profitable sales now, even if margins are a bit lower than in the good times.

And right now, hiring is so much easier than before. There’s more great talent available and readily accessible. A sign of the times is that many well qualified interns will work for free or close to free for three months or more in the hope of proving themselves to you to earn a permanent job.

On funding, deals are still being done – we’re particularly active at Octopus – but for most businesses you’ll need to prove initial traction before you can obtain venture capital funding. So now more than ever, you need to get started with low costs and funding from friends and family, then sell to pilot customers to prove your proposition and cash flow.

If you have a great commercial idea, then don’t be put off by the negativity out there. The current climate is healthy for new businesses, and there’s no better feeling than the sense of achievement in going from a blank sheet of paper to a successful business impacting many people’s lives for the better. Oh and the money can be pretty good too!