Ready to rumble? Today's economy is in a turnaround, but we need entrepreneurs to keep the momentum going. Get your company geared up to take on the challenge

Entrepreneur, May, 2004 by Joshua Kurlantzick

When the U.S. economy goes into a downturn, more Americans, forced out of their old jobs, start businesses. Ultimately, these new businesses help power an economic recovery, providing jobs and putting money in the pockets of consumers. It happened during the last major economic slowdown, in the early 1990s.

Given this history, many economists were prepared for entrepreneurs to lead the country out of the economic slowdown of the early 2000s. But for a time, entrepreneurs didn't respond. In the summer of 2003, John Satagaj, president of the Small Business Legislative Council, said, "I expected us to be in an [entrepreneurial] spurt. I haven't seen it yet."

In the past six months, however, all that has changed. The U.S. economy is predicted to grow by more than 4 percent in 2004.In comparison to previous downturns, this time, many small-business owners waited for the economy to tick upward before making new investments. But now that the economy has started to rebound, small businesses have become more optimistic. A survey released in March by the Business Roundtable, a trade group, found that the number of executives planning to hire outnumbered those planning to slash jobs for the first time in a year and a half. "In the past [few] months, clients have opened their wallets," says Rob Levinson, founder of RL Strategies, a Boston-based marketing firm that works with entrepreneurial companies. And Levinson says, now that an entrepreneurial surge is beginning again, savvy businesspeople are developing strategies to take advantage of it.

SLOW START

Unlike previous recessions, in this downturn, signs of a small-business-led recovery were slow to emerge. According to Heidi Neck, an author of the 2002 "Global Entrepreneurship Monitor (GEM)," a study funded by the Ewing Marion Kaufmann Foundation, the number of Americans planning to start new businesses decreased. And a report released by the outplacement firm Challenger, Gray & Christmas Inc. showed that the percentage of jobless managers who said they were starting new businesses dropped to an average of 6.8 percent in 2003 (down from 9.6 percent in 2002). Compare that to the 1991-92 recession, when roughly 15 percent of jobless managers started companies of their own.

There are several reasons why the surge was slow in coming. Mike Smith, former head of his own PR firm, says the bursting of the tech bubble still inhibited small-business growth in the early 2000s, as the tech crash made VCs gun shy. Fears of global terrorism and the war in Iraq also spooked many entrepreneurs, who worried these events would deter consumers. And, says Erik Pages, former policy director at the National Commission on Entrepreneurship, a group that focuses on public policy and entrepreneurship, people were more reluctant to start businesses because it was harder for them to obtain benefits--primarily health insurance--than during the recession in the early '90s.

LOOKING UP?

Nevertheless, the Commerce Department's GDP and consumer spending figures indicate the economy is growing, if less robustly than in the third quarter of 2003. Powered in part by consumer spending, the U.S. economy grew by 8 percent during the third quarter of 2003 and by 4 percent in the fourth quarter, some of the highest growth rates in five years. Consumer spending in the third quarter of 2003 rose 6.9 percent over the previous quarter--buoyed by a boom in mortgage refinancing and by tax rebates--and by 2.6 percent in the fourth quarter. According to a University of Michigan survey, however, consumer confidence is wavering, having fallen in February 2004.

Despite this, entrepreneurs in the retail sector have been able to slash inventories--in January 2004, orders for goods other than transportation rose, and retail sales overall jumped 0.6 percent--and find the capital needed to hire new workers and expand. Says Satagaj, "Retailers are feeling the best."

And as the government has increased funding for defense and other federal spending, small businesses have been able to take advantage, since the administration has opened more federal contracts to smaller companies. Sequoia Ramsey, president and founder of Realistic Computing Inc., a Baltimore-based computer support firm founded in 2001, has been able to grow her company by relying on government contracts.

Similarly, small businesses have capitalized on the market for homeland security-related products. New Technology Management, a Reston, Virginia-based company with 150 employees, has become a major contractor for the Department of Homeland Security, installing the agency's systems for border surveillance at seaports and land crossings.

Youths are increasingly interested in entrepreneurship. According to the Bureau of Labor Statistics, the number of self-employed Americans between the ages of 20 and 24 is rising, and a recent survey by Junior Achievement Inc., which educates K-12 students about business, shows a plurality of Americans between the ages of 13 and 18 believe owning your own business is more stable than working for a company. Meanwhile, the number of universities offering entrepreneurship classes has risen tenfold in the past two decades (see "Extra Credit" on page 72).