Entrepreneurs and recession: A new look

A year ago, we asked: Is the Great Recession growing Minnesota entrepreneurs?

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We didn’t have a lot of numbers then, but we had anecdotal evidence it was happening and pretty solid data from that last recession that downturns bring out our inner entrepreneur.

We still don’t have definitive answers. But new research by the Federal Reserve Bank of Minneapolis is opening a window on entrepreneurs and recession — and poking holes into some conventional wisdom.

Minnesota can be a tough place to talk about entrepreneurs. This is the region that helped create the medical device industry and develop super computers. But the state doesn’t look great in some comparisons of entrepreneurial activity.

But we have seen a flurry of people at least trying in the recession. The Minnesota Secretary of State’s office reported a big jump in new business filings in 2009, 15 percent more than 2008 and the largest one-year gain in new business filings since 2002.

The Fed went looking for people who started new businesses in Minnesota in 2008 or 2009. They ended up talking to about 20, not enough to be scientific but enough to get a sense of what’s happening.

When it came to funding their business, the owners who talked to the Fed said much of the money came from personal savings and credit. “They did receive funding from sources such as community banks, credit unions, government agencies, family members, and friends, but only after using their personal savings to provide an initial equity injection.”

The Fed also found that, “of the 32 Minnesota-based companies included on the Fortune 1,000 list, well over half were started during tough economic times.”

Maybe the most surprising finding is that the failure rates of new businesses are remarkably consistent in good times and in bad.

Generally speaking, new businesses struggle, whether they are started during a recession or an economic boom. In fact, most studies agree that the majority of new businesses fail.

When we look at five-year survival rates for the new firms started in Minnesota in any given year during the period from 1982 through 2005, the pattern for each year’s batch of new firms is the same: the survival rate drops sharply in years one and two and flattens in years three to five.

“For any given year,” the Fed wrote, “an average of 45.1 percent of new firms survives to age five. In other words, companies founded during recessions are no more likely to fail than any other new company. “

One other nugget that should keep us hopeful: The Fed reported, “All of our survey group members indicated that they believe the economic woes are not over yet. Still, they are optimistic about the future.”

New-Biz-Formation-chart_large.gif(Source: Minneapolis Fed)

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If you’re trying to start a Minnesota business in this recession, please drop a line and let us know how things are going.

Here are some recent posts we’ve done on entrepreneurs and Minnesota.

>Minnesota’s Entrepreneurial Spirit?

>Economic Lookout: Entrepreneur in a recession

>Portrait of an entrepreneur

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