Council Post: How Unemployment Can Spur People To Open New Businesses

Roy Ferman is the founder and CEO of Seek Capital.

Recessions are periodic, almost unavoidable economic downturns that carry significant consequences in their wake. Lots of people lose their jobs, and a significant proportion of businesses go under, either due to mismanagement during rough waters or simply because they were still relatively new and didn’t have enough time to become economically stable enough to weather the storm.

But although unemployment is awful for those who experience it, unemployment can lead people to open new businesses. For instance, U.S. unemployment rates spiked during the Covid-19 pandemic, and despite trending down since last spring, have remained above pre-pandemic levels, yet new business applications increased by 24% in 2020 compared to 2019, according to a U.S. Census Bureau analysis.

Why exactly does this happen? I believe there are several reasons.

Opportunity Cost — High Vs. Low

At first, the idea that unemployment can drive someone to start a business seems counterintuitive. But let me ask you a question: What’s the difference between opportunity costs when would-be entrepreneurs are secure in their jobs versus when there’s a recession?

Let’s think of it another way. Say you’ve always had an idea for an excellent business, but you’ve got a great job making six figures per year, health insurance, the works. It’s a great life, and there’s no real reason to upend everything “just” to pursue your dreams as an entrepreneur.

Then say you become unemployed. Suddenly, the safety of your current job is no longer an excuse not to pursue your entrepreneurial vision.

In a nutshell, unemployment lowers the opportunity cost inherent with pursuing any kind of entrepreneurial venture. It takes a lot of bravery and risk to drop everything and consistently put in 80-hour workweeks as you build your business from the ground up.

Unemployment is hard. But it can also lower the opportunity cost for doing bold things like starting businesses, and that’s a great motivator for entrepreneurs who just needed a reason to take that leap.

Hidden Opportunities

There’s another reason unemployment can lead to new business creation. Simply put, recessions can open up opportunities.

This isn’t just because many businesses close down, though that’s part of the picture. Once competition in a given area (for instance, the restaurant industry) is thinned out due to businesses closing down, it means that those with the funding and the drive to open their own restaurants will have multiple spots to do so when the proverbial dust settles.

More broadly, though, recessions and wide-scale unemployment can reveal insights or show visionary entrepreneurs pain points that no one recognized even existed before. Take 2007-2009, where unemployment peaked at a staggering 10%. As a result, house flipping boomed, and for a good reason: There were tons of properties with rock-bottom prices.

That meant that house flippers with enough ambition could rebuild homes and sell them for significant profits. In other words, it was an opportunity created out of the loss inherent with the recession. This not only gave rise to the house flippers but many connected businesses: contractors, demolition crews, trash removal, construction materials, food trucks near job sites, and the list goes on.

Not All New Businesses Will Be The Next Microsoft

Of course, there’s a caveat with all this talk of opportunity. It’s important to remember that not every new business will reinvent the wheel, nor will every product become the “iPhone” of its industry. Similarly, not every new business will become the next Microsoft. Still, unemployment and economic downturns can open up lots of opportunities for driven and flexible entrepreneurs.

And even though unemployment can provide new windows through which entrepreneurs can see the world (and sometimes see businesses that need starting), it’s important to remember that regular pivoting is still to be expected.

The initial idea of a business rarely survives without being retooled at one point or another. Even late in the game, it’s not uncommon for businesses to pivot toward a different focus or customer market due to miscalculations on the part of their CEO or changing economic conditions.

The Bottom Line

Unemployment can cause people to turn to entrepreneurship since it lowers the opportunity cost and opens up new opportunities for visionaries. That being said, visionaries still need to remain limber and flexible as they start their ventures if they want to capitalize on these opportunities and make the most of each new day.

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