Start-Ups that are Expected to Do Well Despite the Recession

Stephen DeAngelis

December 7, 2009

I have frequently noted that entrepreneurs see opportunities where others see risks. An article in BusineesWeek agrees that “history shows that a certain breed of entrepreneur feeds off adverse conditions, and this recession is no exception” [“Fertile Ground for Startups,” by Spencer E. Ante, 23 November 2009 print issue]. To check out the full list of companies to which Ante refers click on the link. Download Feature_ic_newbiz47_lo31. In a couple of previous posts, I have mentioned one of the companies singled-out by BusinessWeek, BrightSource Energy, (see Exploiting Limited Resources and Update on Solar Energy). The other companies highlighted in the article run the spectrum of products and services from iPhone apps to biotechnology to agricultural. Ante writes:

“Who needs job security? In June 2008, as the recession was moving from bad to worse, Caterina Fake gave up a comfortable, executive-level job at Yahoo! to launch a company. She left California and set up shop in New York City to co-found Hunch, a Web site that uses the experiences of others to help people make decisions. The 40-year-old, who had co-founded the photo-sharing site Flickr before it was acquired by Yahoo, couldn’t resist the idea of creating something new, whatever the economic headwinds. ‘The entrepreneurial spirit really thrives in situations of adversity,’ says Fake. ‘The world is full of more possibility.’ … A crop of potentially groundbreaking companies is emerging from the wreckage of the Great Recession. No question, some will blow up, and others will fail to reach their potential. But the downturn has done little to dampen the entrepreneurial spirit.”

That entrepreneurial spirit is what injects hope into otherwise gloomy situations. That spirit is fed by an optimism shared by all entrepreneurs. As I noted above, they see possibilities when others see gathering clouds. According to Ante, the entrepreneurial spirit is once again stimulating angel investors to open their wallets as well. He reports:

“During the first half of this year, angel investors financed 24,500 new ventures, 6% more than during the same period last year, according to the Center for Venture Research. The overall amount of money going into startups has declined, but the figures suggest that this year will see the birth of roughly 50,000 companies with enough promise that someone is betting money on them. ‘It may be that this is the best time to start a company,’ says Carl Schramm, president of the Kauffman Foundation, an organization that promotes entrepreneurship. … History shows that great companies are often built during bad times. In 1939, at the tail end of the Great Depression, two engineers started Hewlett-Packard in a garage in Northern California. Silicon Valley itself was largely created during the nasty recession of the mid-1970s. During that decade, entrepreneurs laid the groundwork for the boom of the 1980s, building companies that pioneered three new industries: Atari in the video game business, Apple in personal computers, and Genentech in biotechnology. ‘The only people who venture out in tough times are on a mission, which is what you need,’ says Michael Moritz, managing partner of Sequoia Capital, a venture capital firm that invested in Apple back in the ’70s. ‘The people we are meeting are the genuine article, as opposed to the pretenders.'”

Besides the fact that people are looking for any signs of hope in bad times, Ante discusses why hard times may be a good time to start an entrepreneurial endeavor if (and it’s a big if) your idea is a good one.

“Entrepreneurs, financiers, and historians point to several … reasons for this phenomenon. For starters, everything is cheaper during a downturn, including the cost of labor, materials, and office space. There’s less competition both from incumbents preoccupied with putting out their own fires or from other startups unable to raise money. Tighter money means stronger ideas edge out weaker ones. And the tough times force entrepreneurs to work on their business models earlier, so they end up reaching profitability more quickly than when money comes cheap. ‘[The years] 2010 and 2011 should be extremely good years for innovative small companies,’ says Jim Breyer, general partner of Accel Partners, a venture capital firm that has invested in Facebook. ‘We’ll see dozens of very successful companies emerge.'”

That’s good news for the economy because successful businesses hire employees and with the unemployment rate hovering around 10% the U.S. can use all the jobs that can be created. Ante provides some statistical evidence for the important role that new companies play in the U.S. economy.

“Startups are playing an increasingly important role in American business, and they may play a central role in any recovery. As of the end of 2008, companies infused with venture capital were responsible for generating 12 million jobs and 20% of U.S. gross domestic product, according to a recent survey published by the National Venture Capital Assn. A previous NVCA survey found that venture-backed companies accounted for 10 million jobs and nearly 17% of GDP at the end of Popup_48businessengines 2005. Entrepreneurship is also becoming more global. China and India are leading the way, but Tarun Khanna, a Harvard Business School professor, sees pockets of innovation popping up in less obvious places, such as Brazil, South Korea, and Turkey; 5 of the 25 companies on BusinessWeek‘s list are based outside the U.S. ‘Now you are seeing traction in a handful of countries,’ says Khanna.”

Ante makes it clear that just because hard times might be a good time to pursue a great business idea doesn’t mean that it will be easy.

“Recessions certainly present challenges for entrepreneurs. It’s much harder to drum up business, take a company public, or raise money than during good times. In the third quarter of 2009, venture capitalists invested $4.8 billion in 637 companies, down from $7.2 billion and 994 companies in the year-earlier quarter, according to a report from PricewaterhouseCoopers and the NVCA.”

Ante goes on to discuss some of the companies the magazine tapped as “the world’s most intriguing new companies.” He continues:

“Hunch is just one of 25 that made the final cut. Other standouts include Epizyme, a Massachusetts outfit creating cancer-fighting drugs that attack errant proteins; China Water & Energy, a Hong Kong company developing massive wind-power farms in the Chinese countryside; and Driptech, a California startup engineering low-cost irrigation systems for poor farmers around the world. ‘The markets that we are addressing in India and China are vast and untapped,’ says Driptech’s 26-year-old founder, Peter Frykman.”

I would like to conclude this post by looking a little closer at Driptech. Finding enough water for humanity’s needs and feeding a burgeoning population are two of the future’s greatest challenges. Driptech’s technology can help meet both challenges [“A Big Idea for Little Farms,” by Venessa Wong, BusinessWeek, 23 November 2009 print issue]. Wong reports:

“[Driptech makes] equipment, similar to a garden hose with small holes every foot or so. … Although similar kinds of irrigation systems have been used for decades, Driptech is winning business in places such as rural China because its technology is designed specifically for small farms and costs much less than traditional systems. The company’s equipment runs $300 for a one-acre farm, instead of the usual thousands, and as little as $5 for smaller family plots. ‘There are literally hundreds of millions of small-plot farmers suffering from seasonal water scarcity,’ says Peter Frykman, Driptech’s 26-year-old founder. ‘We’re focused on reaching our first million farms as fast as possible.’ Experts say low-cost irrigation could alter the economics of food. Subsistence farmers may be able to grow excess crops they can sell. Countries that rely on food imports could see their dependence on outsiders decline. ‘[These] modern irrigation technologies are the future for water-scarce areas,’ says Claudia Ringler, a senior research fellow at the International Food Policy Research Institute, a Washington (D.C.) think tank.”

For more about the challenges facing the agricultural sector, see my six-part series on the subject beginning with Agriculture Old and New. Wong continues:

“The idea for Driptech grew out of a project Frykman worked on last year at Stanford University, where he completed his bachelor’s and master’s in mechanical engineering. He was looking into drip irrigation, the technique of using hoses and nozzles to drip water only where plants need it, which has spread widely since it took off in Israel in the 1970s. Frykman’s breakthrough was the realization that such systems didn’t have to be made in large manufacturing facilities and then exported abroad. Instead, they could be made with cheap plastic tubing and compact precision lasers, even in facilities in target markets. Frykman founded the company last June with $5,000 of his own money and set up manufacturing in the second bedroom of his Palo Alto home. The company gradually attracted about $100,000 in grants, donations, and investment, and he moved into an office. ‘I was drawn to Driptech because, frankly, their success means people are growing food,’ says Scott Petry, founder of e-mail software provider Postini, who invested $40,000. ‘I’m not looking for monetary rewards.’ Driptech is a for-profit company, and Frykman sees plenty of financial opportunity. His goal is to set up local manufacturing operations so he can lower costs and get the company to profitability. He figures that for $50,000, Driptech can set up a facility that makes tubing for 50,000 farmers per year. China and India are the biggest potential markets, and Frykman has begun to tap both. In Xie’s province, the Lingqiu County government is paying for the equipment for 200 local farms. Liu Wenbo, a county agronomist who has been overseeing the installations, says if the projects are successful the county will buy Driptech systems for hundreds more farms. ‘I think it will be very useful, not only in China,’ he says.”

Even in the United States there are hundreds of thousands (if not millions) of amateur gardeners who could use this technology to help cut down on water use. Frykman is a social entrepreneur who understands that one can do good and still make a profit. If you didn’t click on the link and review the companies selected by BusinessWeek, I recommend that you do — they are indeed intriguing.