Would-be entrepreneurs shun the great shake-out
So it turns out the Chinese word for crisis is not actually opportunity.* For some employees facing redundancy this has nevertheless happily proved to be the case. In certain sectors, at certain times, mass layoffs have historically swelled the ranks of start-up firms. Once handed their P45s, redundant workers discovered it was the perfect chance to realise long-held desires to be their own boss. They scrambled through contact lists and made now anachronistic appointments with bank managers – ideally armed with a redundancy cheque as collateral.
It happened after the 1993 closure of the Digital Electronics Corporation in Galway, which led to the formation of a cluster of indigenous tech firms, sucking in new investment. The still-thriving, Oscar-winning creativity of Ireland’s animation sector was born from the ashes of Sullivan Bluth, the multinational animated movie producer that shut its Dublin doors in 1995. And the demise of aircraft leasing company GPA in the early 1990s is survived by a generation of aviation finance firms.
New figures from Vision-net suggest that this phenomenon isn’t repeating itself – not yet. The number of people choosing to become a company director for the first time has fallen by more than 40 per cent, according to the business information service company. Its study of Companies Office data found that 4,883 people registered as first-time directors in the first quarter this year, down 31 per cent from 7,062 on the same period in 2010. Since then, the sharp decline – described as “telling” by Vision-net managing director Christine Cullen – has accelerated.
Timing is everything. Redundancy is a bitter blow at the best of times, but it is during the best of times that such bitterness can be channelled into productive outlets. Digital, Sullivan Bluth and GPA all closed at a time when the only thing on Ireland’s economic horizon was a massive boom. These were skilled workers freed from their contracts during a time of rising employment and nicely surging wages. But post-bust, start-up business models that would have seemed like simply marvellous ideas in 2001 now look like naive fantasies. Where once customers would have lined up, eagerly contributing to the top line, there is only a vacuum.
Critically, this recession has also been accompanied by a dearth of the one thing even the most innovative of entrepreneurs with the most solid of business plans requires – finance. These are the days when securing a slot on Dragon’s Den is seen not only as a valid strategy, but – for consumer-facing businesses at least – vaguely sensible. It’s a television show, an entertainment. But the banks, after all, are out.
Starting your own business has always been a risk, but in today’s dysfunctional economy it looks suspiciously like a folly. People who do, against the odds, manage to make their debut as a company director face a business climate that is still very obviously in the throes of a vicious shake-out. In May, companies were declared insolvent at a rate of eight per working day and liquidated at a rate of six per working day. Once it was the construction sector that led the implosion, now it is retail and wholesale firms that are hitting the wall with the greatest haste.
Vision-net’s figures show that more than one in every two companies are showing signs “consistent with business failure”, by which they mean a decline in profits, tighter cashflow and an over-reliance on bank finance. Companies failing to meet their daily trade and finance commitments are, according to Cullen, having a “real domino effect” on the cashflow and debt repayments of other companies, exacerbating the crisis. The bulk of liquidated companies’ creditors are unsecured, meaning they’re unlikely to be paid what they are owed. It’s a form of contagion that’s hardly conducive for a fledgling start-up to thrive or even survive.
*Sadly for motivational speakers, the Chinese word for crisis isn’t quite a combination of the characters for “danger” and “opportunity” either.