Financial crises are a ‘filtering mechanism’ for startups


“The financial crisis was a great time for startups,” says Vikas Shah, a professor of entrepreneurship at the Massachusetts Institute of Technology Sloan School of Management, and adviser to the UK government.

The crash of 2007-08 created economic upheaval and political ramifications, but it also necessitated innovation. Shah adds: “Many of our brightest young people, who previously would have defaulted to highly paid corporate and banking careers, were now more open to consider options outside that, simply because of a lack of jobs.”

He calls recessions a “filtering mechanism” for startups, weeding out the weak and ensuring only the strong survive.

It would seem that post-crash more people have made the first step to starting a business. According to Companies House data, the number of new businesses in the UK has risen every year since 2008 – a record 608,110 were set up in 2015.

The link between fast growing startups and a tough economic climate is not limited to the last recession. Shah cites companies such as Microsoft, General Electric, FedEx, Revlon, Hyatt and IBM as high profile examples of businesses that were born in, or close to, an economic crash.

Indeed a number of exciting UK startups emerged in and around the 2008 crash such as Crunch Accounting (founded in 2007, in 2016 its turnover was more than £6.6m), Pure Gym (set up in 2008, in 2015 its sales reached nearly £100m) and MVF (founded in 2009, its revenues were £39m in 2016).

During and after the recession, bank funding for small businesses was tight. For some, such as Luke Lang and Darren Westlake, founders of equity crowdfunding platform Crowdcube, which went live in 2011 (although was registered in 2009), this created an opportunity. “We first began work on Crowdcube right in the middle of the crash. Many people were incredulous that we wanted to start a business that would help to finance high-risk business,” says Lang.

But Crowdcube survived: the platform has raised over £211m through 481 deals and employs 70 staff. Lang say the credit crunch made it easier. “[It] increased the challenges startups faced, making our disruptive model even more valuable, and its potential impact even greater,” says Lang.

Gideon Hyde, co-founder of Market Gravity, also took advantage of the climate, setting up the design consultancy business with Peter Sayburn in 2009. The company rapidly recruited, bringing in 15 staff in its first two years.

“A recession is a great time for finding talent,” says Hyde. “We hired people at about two thirds of the market [salary] rate but we have a profit share model among the team, which appeals to people with an ambitious mindset. There were a lot of people in their mid-twenties who had worked for some good companies but, through no fault of their own, had found themselves out of work.”

Market Gravity works with large companies such as Barclays and Boots, helping them to launch new, technology-focused products and services. Hyde says the financial crash provided an impetus for technology uptake among corporates – Market Gravity’s first client was British Gas. There was a growing understanding [due to the recession] in big companies that they needed to innovate, says Hyde. “There was a shift from using technology as a marketing tool to running your business with it.”

The crash coincided with a boom in smartphones and apps. Figures from Statista show that in 2007 the Apple Store had just 800 apps, but by 2015 there were over 1.5m with business apps the second biggest category. Many of these were created by bright young programmers at universities.

The author: Michel DEURINCK

Michel Deurinck, born in Brussels in 1950, started his career in the Belgian civil service, dedicating over 30 years to public service. Upon retirement, he pursued his passion for journalism. Transitioning into this new field, he quickly gained recognition for his insightful reporting on politics and culture. Deurinck's balanced and thoughtful approach to journalism has made him a respected figure in Belgian media.

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