Why It Pays to Start Companies in Recessions

Could a recession be the best time to launch a tech startup?

A recent study suggests that is the case. The authors found that tech startups that began operations during the 2007-09 recession—and received their first patent in that time—tended to last longer than tech startups founded a few years before or after. And those recession-era companies also tended to be more innovative than the rest.

“The effect of macroeconomic trends is not always intuitive,” says Daniel Bias , an assistant professor of finance at Vanderbilt University’s Owen Graduate School of Management, who co-wrote the paper with Alexander Ljungqvist, Stefan Persson Family Chair in Entrepreneurial Finance at the Stockholm School of Economics.

Drawing on data from the U.S. Patent and Trademark Office, the authors examined a sample of 6,946 tech startups that launched and received their first patent approval between 2002 and 2012.

One group—about 5,734 companies—launched and got their patent outside of the 2007-09 recession. Of those, about 70% made it to their seventh year. But the startups that launched and got their first patent during the recession—about 1,212 companies—were 12% more likely to be in business in their seventh year.

These recession-era firms were also more likely to file a novel and influential patent after their first one. (That is, a patent the researchers determined was dissimilar to patents in the same niche that came before it, but similar to ones that came after it.)

So, why did these recession-era firms outperform their peers? Labor markets played a big role.

A widespread lack of available jobs meant that the startups were able to land more productive and innovative employees, especially in their research and development groups, and then hold on to them. More important, the tight labor markets also meant that the founding inventors—the people named on the very first patent—were more likely to stick around rather than try for opportunities elsewhere.

For startups started during the 2007-09 recession, founding inventors were 25 percentage points less likely to leave their company within the first three years. On average, about 43% of founding inventors in the entire sample left their startup within the first three years.

“Our study really highlights the importance of labor retention for young innovative startups. Retaining founding inventors cannot only help them survive, but also thrive,” Bias says.

Christie’s remained in the grip of an ongoing cyberattack on Tuesday, a crisis that has hobbled the auction house’s website and altered the way it can handle online bids. This could disrupt its sales of at least $578 million worth of art up for bid this week, starting tonight with a pair of contemporary art auctions amid New York’s major spring sales.

Christie’s said it has been grappling with the fallout of what it described as a technology security incident since Thursday morning—a breach or threat of some kind, though the auction house declined to discuss details because of its own security protocols. Christie’s also declined to say whether any of the private or financial data it collects on its well-heeled clientele had been breached or stolen, though it said it would inform customers if that proves to be the case.

“We’re still working on resolving the incident, but we want to make sure we’re continuing our sales and assuring our clients that it’s safe to bid,” said Chief Executive Guillaume Cerutti.

Sotheby’s and Phillips haven’t reported any similar attacks on their sites.

Christie’s crisis comes at a particularly fragile moment for the global art market. Heading into these benchmark spring auctions, market watchers were already wary, as broader economic fears about wars and inflation have chipped away at collectors’ confidence in art values. Christie’s sales fell to $6.2 billion last year, down 20% from the year before.

Doug Woodham, managing partner of Art Fiduciary Advisors and a former Christie’s president, said people don’t want to feel the spectre of scammers hovering over what’s intended to be an exciting pastime or serious investment: the act of buying art. “It’s supposed to be a pleasurable activity, so anything that creates an impediment to enjoying that experience is problematic because bidders have choices,” Woodham said.

Aware of this, Cerutti says the house has gone into overdrive to publicly show the world’s wealthiest collectors that they can shop without a glitch—even as privately the house has enlisted a team of internal and external technology experts to resolve the security situation. Currently, it’s sticking to its schedule for its New York slate of six auctions of impressionist, modern and contemporary art, plus two luxury sales, though one watch sale in Geneva scheduled for Monday was postponed to today.

The first big test for Christie’s comes tonight with the estimated $25 million estate sale of top Miami collector Rosa de la Cruz, who died in February and whose private foundation offerings include “Untitled” (America #3),” a string of lightbulbs by Félix González-Torres estimated to sell for at least $8 million.

Cerutti said no consignors to Christie’s have withdrawn their works from its sales this week as a result of the security incident. After the De la Cruz sale, Christie’s 21st Century sale on Tuesday will include a few pricier heavyweights, including a Brice Marden diptych, “Event,” and a Jean-Michel Basquiat from 1982, “The Italian Version of Popeye Has no Pork in his Diet,” each estimated to sell for at least $30 million.

But the cyberattack has already altered the way some collectors might experience these bellwether auctions at Christie’s. Registered online bidders used to be able to log into the main website before clicking to bid in sales. This week, the house will email them a secure link redirecting them to a private Christie’s Live site where they can watch and bid in real time. Everyone else will be encouraged to call in or show up to bid at the house’s saleroom in Rockefeller Center in Midtown Manhattan.

If more bidders show up in person, the experience might prove to be a squeeze. During the pandemic, Christie’s reconfigured its main saleroom from a vast, well-lit space that could fit several hundred people into a spotlit set that more closely evokes a television studio, with far fewer seats and more roving cameras—all part of the auction industry’s broader effort to entice more collectors as well as everyday art lovers to tune in, online.

Once this smaller-capacity saleroom is filled, Christie’s said it will direct people into overflow rooms elsewhere in the building. Those who want to merely watch the sale can’t watch on Christie’s website like usual but can follow along via Christie’s YouTube channel.

Art adviser Anthony Grant said he typically shows up to bid on behalf of his clients in these major sales, though he said his collectors invariably watch the sales online as well so they can “read the room” in real time and text him updates. This week, Grant said a European collector who intends to vie for a work at Christie’s instead gave Grant a maximum amount to spend.

Grant said the cyberattack popped up in a lot of his conversations this past weekend. “There’s a lot of shenanigans going on, and people have grown so sensitive to their banks and hospitals getting hacked,” he said. “Now, their auction house is going through the same thing, and it’s irksome.”

Why It Pays to Start Companies in Recessions

A study suggests that when jobs are hard to come by, the best workers are more available—and stay longer

The auction house plans for sales to proceed, including for a Warhol ‘Flowers’ estimated at $20 million