Down times spark start-ups

Last August, after a 15-year career in Internet software, Don Bender was laid off. Tired of the corporate world, he decided to use his three-month severance package to start a photography business, fulfilling a long-standing dream.

"This is something I've been contemplating for a few years, and this was the perfect opportunity," says Mr. Bender of Austin, Texas.

With that decision, he joined an intrepid band of pink-slipped workers who are trading 9-to-5 jobs with steady paychecks for independent business ventures. For some, like Bender, the switch to self-employment involves a deliberate choice. For others who are unable to find another job in recessionary times, it represents a default position. Either way, the move requires hard work and often a steep learning curve.

"Many people want to start their own businesses, but few understand the dynamics and challenges," says David Reeves, who launched a public relations firm in Boca Raton, Fla., 15 years ago.

"Some will say they want the 'freedom' of coming and going as they please. Wrong. You'll put in more time than ever," he says. "And if you've come from a salaried position, you're accustomed to getting that paycheck every week or so, like clockwork. That's not the case when you have your own business. It does require a different mind-set – the difference between having an employee mentality and an entrepreneurial mind-set."

The latest data from the Bureau of Labor Statistics show that the number of self-employed Americans has fallen by an average of 74,000 per month since August. In February, there were 8.9 million self-employed Americans, down from a peak of 9.9 million in December 2006.

For Bender, preparing for his entrepreneurial venture included creating a website and enrolling in business classes. Even so, he has faced challenges.

"I'm primarily an action photographer, shooting high school football games and motocross events, and the equipment needed for this type of photography is costly," he says. "I ended up using much more of my severance money on equipment than I originally planned. That has forced me to look for contract work back in the high-tech industry. Becoming profitable has been a slow process, which has caused me to reevaluate my business plan and pursue some more profitable options, such as wedding and portrait photography."

When those who have been laid off say they want to start a business, Jim Malski, president of Action Coach, business consultants in Westport, Conn., asks an all-important question: "Why are you doing that?" He adds, "Running your own business is hard. Deciding to go into business as a last resort is a bad reason. A good reason is, 'This is something I've wanted to do for a long time.' "

Mr. Malski notes that 80 percent of businesses fail before Year 5, and 96 percent fail before Year 10.

Greg Henley, director of the Center for Entrepreneurship at Georgia State University in Atlanta, urges fledgling entrepreneurs to undertake a careful analysis before launching a new venture.

"They must really define what business they are in," he says. "Many people haven't fully defined who their customers are, how they'll reach them, and how large the target market is." In addition, many who go into business don't fully analyze their competitors and what strength the competition has.

"A key question to ask up front is, 'Why would anyone buy this product or service?' " Mr. Henley says. During an economic downturn in particular, the biggest risk is that potential customers are not spending money.

Too often, Henley finds, people lack an objective view of their business. "They fall in love with their own idea." Some also have a poor financial understanding of the potential business.

"You've got to be willing to invest time and money," Malski says. "You really have to understand what the cash requirements are going to be. Only when you know those numbers can you put a plan together to get them."

Cash requirements once played a critical role for Andrea Stenberg of Owen Sound, Ontario, Canada. After being laid off four years ago by a nonprofit organization, she created her own business as a copywriter, writing marketing materials for small and medium-size firms. Eventually she moved into a coaching role, helping entrepreneurs learn how to do their own marketing.

Although Ms. Stenberg's initial costs were low – she started with her existing computer and Internet access, a business card she had printed at Staples, plus a website she created from a template – she faced the challenge of inconsistent cash flow, particularly in the early months.

"I had a moment when my unemployment insurance ran out, and I didn't have enough money coming in to pay the mortgage," Stenberg says. "I had to make a decision. I called the bank and asked them to cash in my retirement fund. When I got off the phone I sat on the floor and cried. It was scary. But that was the moment things turned for me. I'd put everything I had into this business and became more daring. Being more daring is what's led to my success."

But even daring has its limits. Individuals must also be sure they bring the right talents to the business, Henley says. Their venture also needs a measure of uniqueness.

"Make sure you're going to get into a business you're passionate about," Malski says. "Start-ups are tough, with long hours. You've got to really love it. You're going to have to do a lot of things you're not used to doing. You need to be ready to get down in the trenches."

That is particularly important for those coming out of corporate America, who have been accustomed to relying on marketing, advertising, accounting, and human resources departments. Now they must get that help on their own.

When Consuelo and Jeff Bova of Tampa were laid off within months of each other from a financial-services company during the last economic slump in 2005, they decided to start their own business, ForTheFit.com, an online short men's clothing retailer.

Their challenges included isolation from friends and family who did not understand their choice, sacrifices in their lifestyle and personal budget, and fear about needing to return to the mainstream workforce.

Even so, Ms. Bova says, "We have never looked back and are thrilled with the rewards of our choice." Those include economic freedom and self-determination, a better work/life balance, and enhanced professional skills.

Stenberg's rewards include being responsible for her own success and being able to work around her son's school schedule.

Judy Lawson, president of TLC Staffing in San Diego, started her company in 1985 after a layoff. "The challenges are huge," she says. "Be prepared for that, but don't be so intimidated that you lose your nerve. The three things you will need, along with your very well-designed business plan, are a good and trusted banker, a good and trusted lawyer, and a good and trusted accountant. Plus a lot of faith in yourself and a bank account that's seemingly at times bottomless."

Undaunted, an optimistic Bender notes that his photography business will be the career he takes into retirement. "My layoff has given me the opportunity to go after this much sooner than I most likely would have had things remained the same," he says. "Working on my own is incredibly rewarding. I couldn't be happier."