Born in the Crucible of Recession
Is it true that more Fortune 500 companies are founded during economic contractions?
Since the Covid-19 pandemic hit, investors in our network have speculated about the prospects for newly formed startups. Have we entered a period where fewer companies worthy of our capital would be founded, or more? On June 8th, the National Bureau of Economic Research (NBER) announced that the U.S. economy entered a recession in Feburary 2020. Now that the recession is official, can we say that the companies founded in 2020 have a better chance of becoming giants in their industries?
We were inspired by a 2009 Kauffman Foundation study that analyzed when companies on the Fortune 500 list were founded. The Kauffman team concluded that “well over half of the companies on the 2009 Fortune 500 list … began during a recession or bear market” and noted that 33% of the time period studied was a recession or a bear market. Thus, the authors implied that there is something about companies founded during economic downturns that leads them to high growth or industry leadership. Since we are in a period of economic contraction, we wanted to update the data and analyze it to see whether the most recent Fortune 500 list displayed the same pattern for recessions.
The Kauffman analysis used the 2009 Fortune 500 list and defined economic downturns in two ways:
- Recessions identified by the NBER from 1854 to 2009
- Bear markets in from 1945 to 2009, defined as a period where the S&P 500 or Dow Jones Industrial Index dropped by 20% or more over a two month period
Our analysis updates the company list and isolates the effects of recessions as distinct from bear markets.
For this analysis, we used the 2019 Fortune 500 list. The list includes the 500 U.S. based companies with the highest revenue for the previous fiscal year. In contrast to the Kauffman study, we wanted to look strictly at whether these companies were founded during a recession as defined by the NBER. As we can see in the 2020 economy, stock market performance and economic activity measured by GDP can diverge. While bear markets often coincide with recessions and can be linked with macroeconomic conditions that hurt company formation and growth, we wanted to focus our analysis on only one definition of economic downturn.
We identified the founding date for each company in Pitchbook. In cases where the current incarnation of a company is the result of a merger (for instance Walgreens Boots Alliance, which came out of the merger of Walgreens and Alliance Boots in 2014), we used the company’s website to determine when the business started (in the case of Walgreens, 1901).
We compared our list of founding dates to the dates the economy was expanding and contracting according to the NBER. The NBER’s data begins in December 1854, so our analysis excludes the 32 companies founded before 1855, leaving 468 companies in the final data set.
Since 1855, the U.S. economy has contracted, or been in a recession, 37% of the time. This is in line with the Kauffman study’s analysis which showed the U.S. economy contracted or experienced a bear market 33% of the time. Of the companies we analyzed on the 2019 Fortune 500 list, 24% were founded during a recession. In contrast with Kauffman’s conclusions from 2009, our analysis indicates that fewer large companies were founded during recessions.
However, since World War II, the economy has a pattern of recession and expansion that is distinct from the pre-World War II era. Thus, we segmented our data into companies founded up to and including 1945, and those founded after 1945.
About half of the companies on the list were founded before 1945, half after, with a median age of 72 years. There are more years represented after WWII, which raises a question for further study: what are the characteristics of the companies on the Fortune 500 that have maintained a leadership position for over 100 years?
In the post-war era, 15% of the period has been a recession, compared with 10% of the relevant Fortune 500 companies founded during those recessions.
The pattern holds for companies founded before 1945, though the proportion of time in recession is larger. In the pre-war era, 53% of the period we studied was a recession, and 40% of Fortune 500 companies were founded during those recessions.
Our analysis indicates that the correlation identified by the Kauffman team may have been specific to the list of companies on the Fortune 500 in 2009, rather than a reliable signal that predicts company success. 193 of the companies that were on the list in 2009 were not on the list in 2019, nearly 40% of the data set. This raises another question for further study: are the companies that stayed on the Fortune 500 from 2009 to 2019 more likely to have been founded during a recession?
Our analysis assumes that the number of companies founded during recessions should be proportional to the time the economy spends in recession. If, for example, we determined that twice as many companies are founded during a single year of expansion compared to a single year of recession, we would revisit these conclusions.
In future studies, we will analyze the relationship between bear markets and when a company was founded, to determine whether the Kauffman study’s conclusions hold for stock market downturns instead of recessions.
This analysis does not suggest that companies founded during recessions necessarily have a better or worse chance of becoming members of a list like the Fortune 500. They do indicate that industry leading businesses can be born independent of whether the economy is expanding or contracting. As VCs, we look at many indicators of future success in the startups we evaluate. Knowing that there may be stronger signals of potential for returns than the economic climate can help us focus on business characteristics that may have more predictive value.
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Selina Troesch Munster (firstname.lastname@example.org) is a Principal at Touchdown Ventures, a Registered Investment Adviser that provides “Venture Capital as a Service” to help leading corporations launch and manage their investment programs.
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