Prospects for Startups in 2011

Jeff Cornwall isn’t too optimistic:

If you are already in business, remain cautious and prudent. Build your cash as best you can, and avoid additional debt at all costs.

If you are hoping to start a new business in 2011, know that there are still opportunities out there. But approach any new business startup with as lean and bootstrapped a game plan as possible.

Surprisingly, there is little research literature on entrepreneurial activity over the course of the business cycle. A recent paper by P. Koellinger and Roy Thurik examines self-employment rates over time across 22 OECD countries and finds that self-employment leads GDP, rather than being pro-cyclical or independent of overall economic activity. Some implications:

The present analyses show that entrepreneurship not only plays a role in the structural sense but also in the cyclical sense. The intrinsic forces of the entrepreneurial economy could help fight the crisis. . . . First, the effect of unemployment on entrepreneurship depends upon the level of unemployment benefits (Koellinger and Minniti 2009). Demand stimulation through raising unemployment benefits, which is the European instinct, is detrimental to recovery. Second, the cry for more regulation after the demise of the banking sector should not lead to an increase in other (entrepreneurial) parts of the economy.17 Third, when also non-banking firms start applying for financial support arguing that they are “system players,” the question should be raised whether to support incumbent industries or future ones which may grow out of current entrepreneurial initiatives.