Isn’t Necessity The Mother of Invention?

You might not know that the origin of that famous quote is attributed to the Greek philosopher Plato who wrote in The Republic, “our need will be the real creator”.  Over many years, translators turned Plato’s thought into the famous saying most of us are familiar with – Necessity Is The Mother of Invention.

As I shared in Issue 001, I conducted primary research in 2008 which indicated that white collar, tech-savvy professionals in a variety of corporate functions were starting over as entrepreneurs.  A little over half of them suggested that growth would be their top priority while 44% were uncertain or focused on something else.

In Issue 002, I presented how I believed the companies born of The Great Recession were led by a large wave of the most talented businesspeople to ever “choose” entrepreneurship.  How the recession had robbed them of a lucrative career working for someone else.  How even though their origin story may have been accidental, their approach to business was anything but.  I called them velociraptors released into the herd and gave them a new nickname – The Profit Machines.

For years I wondered if any empirical research studies of the Great Recession cohort would ever emerge.  Would anyone conduct a study of these companies over many years which would assess how successful they had become?

In 2023, I got my answer.

In this issue of The SMB Cohort, I will share an academic study of one type of company born during The Great Recession:

Great Recession Babies:
How Are Startups Shaped by Macro Conditions at Birth?
Daniel Bias¹ and Alexander Ljungqvist^2,3
1Vanderbilt University, United States of America
²Stockholm School of Economics and Swedish House of Finance, Sweden
³CEPR, United Kingdom

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In the next three Tuesdays, you’ll get:

·      Issue 005 – the bridge to the parallel weekly braid you’ll get from Issue 006 onward describing the present-day implications of The Accidental Entrepreneur and what I expect, and will be discovering in real-time, about The Artificial Entrepreneur.

·      Issue 006 – the first issue dedicated to The Silver Tsunami—the business transition where trillions of dollars of U.S. GDP hangs in the balance.  The companies founded and led by the “Boomerpreneurs”, the engine of the Accidental Entrepreneur cohort, need to plan their eventual exit.  How can we help them?

·      Issue 007 – the first issue dedicated to The Artificial Entrepreneur—I will share the parallels between the opening scenes of The Great Recession in 2008 and the AI displacement that’s hitting young professionals today.

But to go forward, we have to go back.

The paper is 116 pages, so I will summarize the findings and reveal the surprising reason these startups born of The Great Recession outperformed despite launching when funding was scarce and demand was declining.

Professors Daniel Bias and Alexander Ljungqvist needed a way to separate the recession’s actual effect on a startup from the fact that different types of founders choose different times to start a business in the first place — someone willing to launch mid-recession may simply be a different kind of founder than someone who waits it out.  To isolate the real effect, they narrowed their focus to innovative startups — companies built around a patentable idea — and leaned on two sources of quasi-random chance.

The first: patent examiners at the U.S. Patent and Trademark Office review applications at different speeds, and backlogs routinely stretch decisions out by years — which examiner you draw is essentially random.  The second: the business cycle itself. Put the two together, and a startup’s actual launch date ends up shaped as much by bureaucratic timing as by founder intent.  That’s the natural experiment the whole study rests upon.

The Bias and Ljungqvist empirical design compared startups who received patent news in a recession to otherwise similar startups who received patent news at other times.  The receipt of patent news constitutes an “invitation” to begin life in the recession (described as intention-to-treat or ITT in the language of randomized control trials).

Here’s the design in plain terms.  The receipt of patent news works like a random invitation to be born in a recession — some startups get the invitation and take it, some get it and sit on it, some never get it at all.

Three types of founders respond differently:

Never-takers — wait for the recession to end no matter what.  Even a fast-cleared patent doesn’t change their timeline.

Always-takers — launch in the recession no matter what happens with the patent.  These founders are generally viewed as “forced entrepreneurs” — often people pushed out the door by a layoff, not pulled in by an invitation.

Compliers — founders whose actual launch timing moves with the instrument.  A fast patent decision pulls them into the recession; a slow one pushes them into the expansion instead.  These are the only founders whose behavior the instrument actually explains — and they’re the group the chart below is built around.

That distinction is what explains the two numbers you’re about to see.  ITT (intention-to-treat) measures the effect across everyone who got the “invitation” — always-takers, never-takers, and compliers, all mixed together, diluted by the fact that always- and never-takers would have done the same thing regardless of the patent’s timing.  LATE (local average treatment effect) strips those two groups out and isolates the compliers — the founders for whom recession timing was the actual deciding factor.  That’s why LATE runs almost double ITT in the results below: it’s measuring the founders the recession genuinely changed, not just the ones who happened to be there when it hit.

Great Recession Babies — The Chart

Great Recession startups vs. expansion startups, seven years out

Source: Bias, D. and Ljungqvist, A., “Great Recession Babies: How Are Startups Shaped by Macro Conditions at Birth?”  Tables 3 and 6.  Sample: 3,870 US startups filing a patent application from 2002–2009 and receiving a decision by 2012 (1,358 recession-born, 2,512 expansion-born), tracked through 7 years; N=3,028 in regression due to singletons. First-stage instrument F-test = 152.1 (ITT) / 38.1 (LATE).  SSRN Working Paper No. 4298934 (most recent publicly available version).

The Core Result

Great Recession startups vs. expansion startups — causal effect over 7 years

Bias-corrected ITT (“core estimates,” Table 3 Panel C) compares startups invited to be born in the recession to those invited to be born in an expansion, correcting for examiners’ non-random departures from strict date-order priority.  LATE (local average treatment effect, Table 6 Panel B) is the causal effect on the subset of startups whose birth timing was actually shifted by the instrument — the paper’s estimate for compliers, roughly twice the ITT.  A simpler, naive OLS version (Table 2) shows a smaller but still positive effect: +4.8 pp survival and +18.0 pp cumulative employment growth over 7 years.

Source: Bias, D. and Ljungqvist, A., “Great Recession Babies: How Are Startups Shaped by Macro Conditions at Birth?”  Tables 3 and 6.  Sample: 3,870 US startups filing a patent application from 2002–2009 and receiving a decision by 2012 (1,358 recession-born, 2,512 expansion-born), tracked through 7 years; N=3,028 in regression due to singletons. First-stage instrument F-test = 152.1 (ITT) / 38.1 (LATE).  SSRN Working Paper No. 4298934 (most recent publicly available version).

What Bias & Ljungqvist Actually Found

The two visuals above break down into two numbers you need to hold in your head simultaneously.

The first is the “how big” question — the bar chart.  Look at cumulative employment growth over seven years: startups born into the Great Recession outgrew startups born into an expansion by almost 64 percentage points.  Sales growth: same story, +68 points. Survival: +27 points.  Those are the bias-corrected numbers — the honest, conservative estimate, adjusted for the fact that patent examiners don’t hand out decisions in perfectly random order.

The second number is “how strong” — the darker bar in each pair, the LATE estimate.  This isn’t a rounding difference.  LATE isolates the startups whose birth timing was actually moved by the instrument the researchers used — real compliers — founders who chose to launch during the recession — not the whole sample.  For that group, the causal effect roughly doubles: +120.1 points on employment growth, +128.2 on sales, +50.8 on survival.

Translation for operators: this isn’t “recession babies did fine.”  This is “recession babies that got directly hit by the timing shock didn’t just survive — they built structurally stronger companies” — and the effect held up under two different ways of measuring it.

The Core Result table does the same job in a different format.  It’s the one to screenshot if you’ve got ten seconds: outcome, bias-corrected number, LATE number, and statistical significance, side by side.

The Mechanism Nobody Expected

Why?  For years the assumption — mine included — was that recession founders make leaner, scrappier decisions because they must.  Necessity is the mother of invention.  Bootstrap discipline forces itself into the business model.

I still believe that matters, but this paper didn’t test that.

Table 8 of the paper looks at something completely different: not what founders decide, but who stays.  Startups born in the recession were 22.4 percentage points more likely to retain a founding inventor through their first year — against a 38% unconditional departure rate for founding inventors in a normal year.  That’s not a small effect on a small population.

Here’s the mechanism: when the broader labor market is hot, your best technical people have somewhere else to go — a bigger paycheck at an incumbent, a hotter startup down the street, a return to grad school.  When the labor market is cold, that outside option disappears.  The founding inventor who might have walked in 2006 stays put in 2009 — not necessarily because they love the mission more, but because there’s nowhere better to walk.

And the founding inventor is the one holding the actual IP, the actual technical judgment, the actual institutional memory of why the product works the way it works.  Keep that person in the building for an extra year, and you keep compounding on the same base of knowledge instead of re-explaining it to a replacement.  That’s not scrappiness, that’s continuity.

Necessity Was The Mother of Retention

I am certainly no Plato, but here’s my new line to describe what I learned from Bias and Ljungqvist’s analysis of Great Recession Babies:

Necessity wasn’t just the mother of invention; it was the mother of retention.

The old story said recession founders build leaner because they have no choice.  True, but incomplete. The fuller story: recession founders build on a team that doesn’t leave, because the market gave that team no better option either.  The founder isn’t the only one facing necessity — so is the inventor whose patent the company was built around.  And when they don’t leave, the company doesn’t lose the year it would otherwise spend re-hiring, re-training, and re-explaining.  It compounds instead.

That’s the through line back to Issue 003’s Cohort Formation Index — it’s my conclusion that inventor retention was a significant contributor to the Index staying elevated well past the 2009 trough.  It’s not just that more companies got formed under duress.  It’s that the companies that got formed kept their founding teams intact long enough to actually build something. Formation without retention is just churn with better paperwork.  Formation with retention is a durable cohort — which is exactly what the Accidental Entrepreneurs of 2009 turned out to be, seventeen years later.

If you’re managing through this cycle — hiring, budgeting, deciding who to keep — the finding isn’t “cut costs and hope.”  It’s this: your best chance to lock-in the people who carry the company’s technical judgment is when they have the fewest outside options.  That’s a cynical way to say it, but it’s also accurate.  The Accidental Entrepreneur cohort didn’t out-hustle everyone else.  They just did a better job of retaining their most inventive people at the moment it mattered most.

Did This Strike A Chord?  What Do You Like?  What’s Missing?

Are you in possession or have seen a piece of research that does a good job of x-raying the dramatic changes in SMB caused by The Great Recession?  The Pandemic?  The AI Revolution?  Hit reply and tell me.

Were you a Profit Machine who started a company during The Great Recession?  Did you know/do you know any?  How did you/they fare?

I’d like to meet you/them and hear your/their story.  With your/their permission, I want to share as much real-world experience from those who lived it and I may use anecdotes or case studies in future issues.  Introduce us please.

I can deliver a better quality, reader-centric production if you are willing to provide me with real-world examples and logical, empirically supported feedback.  Have some data that conflicts with my market assessment?  Share it and I’ll respond and learn from you.  Disagree with one of my conclusions?  Tell me and we will have a civil discussion.  Maybe you will convince me, and I will share with the group.  Leave me feedback by replying to this newsletter or emailing [email protected].

History Doesn’t Repeat Itself, But It Rhymes

Eighteen years later, another cohort is being born under conditions that rhyme with 2008 – but the disruption isn’t an “econoquake” this time—it’s Artificial Intelligence.  And the professionals AI is displacing are young, technical and armed with the very tool that’s disrupting their traditional path.

I now realize that The Great Recession produced a cohort of businesses that were more durable, more successful and more impactful on the U.S. economy than any that had preceded them.  With the benefit of hindsight and a collection of empirical research that I believe acts as a “cohort detector”,  I’ve built a Cohort Formation Index and am calling the birth of The Artificial Entrepreneur cohort in public, before it’s obvious, with a paper trail you can check me against.

Next week, I will introduce you to three cohorts, one thesis. What the Accidental, Airborne and Artificial Entrepreneurs have in common and why the parallel weekly issue “braid” for only two cohorts begins in week 6.

In the next three Tuesdays, you’ll get:

·      Issue 005 – the bridge to the parallel weekly braid you’ll get from Issue 006 onward describing the present-day implications of The Accidental Entrepreneur and what I expect, and will be discovering in real-time, about The Artificial Entrepreneur.

·      Issue 006 – the first issue dedicated to The Silver Tsunami—the business transition where trillions of dollars of U.S. GDP hangs in the balance.  The companies founded and led by the “Boomerpreneurs”, the engine of the Accidental Entrepreneur cohort, need to plan their eventual exit.  How can we help them?

·      Issue 007 – the first issue dedicated to The Artificial Entrepreneur—I will share the parallels between the opening scenes of The Great Recession in 2008 and the AI displacement that’s hitting young professionals today.

See you next Tuesday.

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After the Foundation, the two parallel weekly threads run in alternating fashion, with crossovers. 

The SMB Cohort is independent research and commentary. Analysis draws on primary research, public and licensed data sources, and the author’s professional experience and judgment; while rigorously developed, it can be wrong. Nothing published here is investment, financial, legal, tax, or other professional advice, and nothing should be acted on without independent verification from other sources. Brian D. Burch and The SMB Cohort accept no liability for outcomes resulting from reliance on this content.