Starting Up : For Some, Launching a New Company Now Makes a Lot of Sense

The ongoing recession has crippled the state’s economy and crushed the dreams of hundreds of entrepreneurs, but there are still a few bold souls willing to risk their life savings to start up businesses.

Undeterred by the worst economic downturn since the Great Depression, these business people have ignored conventional wisdom to follow an age-old call that has prompted other would-be Sam Waltons to leave secure corporate employment.

They are doing so in part for the traditional reasons: frustration with ordinary jobs, a drive for independence, a chance to reap the rewards of their own hard work.

That they are doing so now says a lot about their determination: A recession usually means that more businesses are failing than succeeding and that markets are contracting overall.

But like the bold investor who buys stocks when everyone else is selling, a number of gutsy local business people have seen opportunity where most others see disaster:

* In West Los Angeles, a couple has opened a coffee house, figuring that even during recession people want a night out now and then, but would rather spend two bucks on a cup of coffee than $15 on a full dinner.

* In San Dimas, a pair of brothers has founded a company to sell equipment that enhances the performance of portable computers, figuring that budget-strapped users would rather buy accessories than order complete new systems.

* In the South Bay, a contractor has discovered a niche in office renovations and home rehabilitations, figuring that in a slack real estate market, people would rather fix up what they have than buy something new.

Do they know something we don’t? Maybe, experts say. It’s cheaper to start a business when times are tough. There’s also more talent on the streets. And a savvy entrepreneur can identify markets that open when other markets are collapsing.

In a recession, many businesses are started by people who lose their jobs, said Jon P. Goodman, director of the entrepreneur program at the University of Southern California. For them, a recession acts as a kick in the pants.

“Many have reasonable net worth, severance agreements, miniature golden parachutes, golden lollipops, whatever. For the first time in their lives, these people are not only faced with the opportunity to start businesses, but also with the need,� she said.

There are some precedents for success. The Gap clothing chain opened its first store in 1969, the year before recession struck, and enjoyed years of success--in part because of low prices--before starting to languish in the late 1970s. The company blossomed again in the mid-1980s with a new merchandising strategy.

Similarly, Compaq Computer Corp. was founded in 1982, at the end of the last serious economic downturn. Riding a wave generated by IBM’s personal computers, Compaq ended up being one of the fastest-growing companies of the time: It set a record for first-year sales, reaching $111.2 million in 1983.

The Small Business Administration reports that the number of business incorporations fell during the current and last recessions. The number of new businesses incorporated in California has fallen from 48,200 in 1989, the last non-recessionary year, to 36,600 in 1991, the SBA reports.

Still there are signs that the trend may be shifting. A report last month by the business research firm Dun & Bradstreet showed an increase in the number of state business start-ups for the first half of this year, reversing a five-year decline.

Not surprisingly, capital to start businesses is at a premium during bad times.

“It’s a very difficult time to raise capital, no question about that,� said Fred Haney, president of Venture Management Co. “It went from a situation where there was too much money in ’87 and ‘88, to a situation today where there’s too little money. And the number of venture capital firms in Southern California has really shrunk.

“On the other hand, if I was an investor with capital now, I’d think it was a very good time to be investing. The real answer is always the same. If you have a really quality idea, it makes good business sense and you’ve identified a management team of people who can make it happen . . . then funding is usually available.�

*

The twoPART cafe occupies a simple storefront on a busy stretch of Santa Monica Boulevard near Westwood. A sidewalk sandwich sign with a huge red “2� announces the place.

Inside, soft jazz, watercolors and white canvas furniture signal that this is the antithesis of the frenetic java places that have become popular among the goatee set.

It comes as no surprise that the coffee house is the brainchild of an unlikely pair of trend watchers: Chris Fang, 25, and her partner, Marc Junkunc,26, onetime investment bankers at Morgan Stanley & Co.

The twoPART evolved from discussions the two had after meeting in Morgan Stanley’s Los Angeles office. Their goal was always to go into business for themselves. They decided to start small to build credibility.

“We started thinking about entrepreneurship generally, and at the same time started to see a need in Los Angeles for a very casual, accessible kind of place just to relax and hang out that was an alternative to the bar scene,� said Junkunc.

They figured that a coffee house would be less risky than a full-fledged restaurant and relatively simple to operate.

Fang entered the entrepreneurial studies program at UCLA, where she wrote a business plan. A year later, Junkunc joined her. They began work in February, 1991, and opened a year later.

They financed the venture with credit card loans (since repaid) and money saved from their Morgan Stanley jobs during the waning days of the 1980s financial boom. They won’t say how much they invested, but Junkunc added: “You can probably pull one of these off for something between $30,000 and $100,000.�

They said the recession has made things easier. When it came to picking a location, “we were able to look at a lot of different sites, talk to a lot of different landlords and negotiate a pretty attractive lease,� Junkunc said.

Similarly, suppliers were more willing to work with the fledgling cafe owners--selling them smaller volumes of materials, even negotiating discounts.

And Fang said the risk was lower because of the downturn. “There are low opportunity costs because of a recession,� she said. “We left high-paying jobs to go back to school, but who’s to say those jobs are still there.�

The coffee place, which employs 10 part-time workers, is profitable, the two said.

“There are so many things that we feel very good about having done this,� Junkunc said. “You’re helping out employees. We pay our coffee supplier, and there’s two bakers, there’s our landlord, there’s a bread supplier, our insurance company, and this is all feeding back into the economy. It makes you feel good to be able to do that in this time.�

Vaseem (Sid) Siddiqui, 49, an aerospace engineer by training, left the industry to start his own computer company, Parallel Peripherals Technology, because he was tired of corporate life.

“I love the challenges� of running a business, said Siddiqui, who worked for 12 years at Loral Corp., Douglas Aircraft Co. and elsewhere. “The main thing is, you can test your ability yourself. . . . I got so frustrated in the old boys’ network in the corporation. I said, ‘To hell with it; I want to make my own music.’ �

With his brother Javeed (Jay) Siddiqui, 42, he put together his six-employee company with about $100,000 in savings, home loans and whatever else they could “beg, borrow or steal.� Another $150,000 came in the form of services provided by suppliers and supporters.

Operating out of a modest office in an industrial park in San Dimas, the company markets hard-disk drives and other gear for laptop and notebook computers. It owns the technology for its products, but contracts with outside suppliers to design, manufacture and develop software for its equipment.

The company began shipping products in April. Jay handles sales and marketing; Sid is the engineer and manager.

The brothers, natives of India who moved to Pakistan before immigrating to the United States about 20 years ago, got their first big break at a computer trade show in Germany. That led to a flood of orders. Now, they sell almost exclusively to distributors and original equipment manufacturers in England, Germany and elsewhere in Europe.

“There’s a niche in the market,� Sid Siddiqui said. “This was needed as the computers are getting smaller and need more storage capacity to work with.�

Added Jay Siddiqui: “With the recession situation, people are not buying new computers. They’re not going out buying new laptops, they want to do more with the older ones. . . . That’s the other advantage we have.�

For the three months ended in June, the company had more than $423,000 in sales and was profitable, the brothers said.

As for competition, “this is a good time to start a business, because everyone is on the same level,� Sid Siddiqui said. Moreover, there’s more management skill available, he said.

Sid Siddiqui said a few venture capitalists have offered to pony up funds in exchange for an equity share of the business. They have turned down the offers, despite cash flow problems.

That remains the company’s biggest problem, Jay Siddiqui said. “We had no other choice but to respond to the demand. . . . But to service a purchase order, we are tying up our money to fulfill it and ship it.�

The recession has meant that payments may be delayed longer than usual. “The first question (customers now ask) is about net terms, and they aim for 60 days� to pay, Jay Siddiqui said.

But Sid Siddiqui said he would rather start a business in a recession than a boom period. “A lot of people say, ‘Hey, the economy’s so bad, why are you opening a business?’ But it’s real helpful.�

John Katnik, 27, wanted to become a developer but saw the writing on the wall when the recession struck and the real estate industry went into a tailspin. So the former USC football player took a job in sales for a sporting goods company. He hated it.

“My heart wasn’t really in it,� said Katnik, who holds degrees in public administration and urban planning. When the chance came to help a developer build a house in Palm Springs, he jumped at it.

That led to his winning a contractor’s license. Nine months ago, he quit his job, and with his wife, Michelle, started Diversified Development Co. using about $20,000 in savings.

His goal is still to buy and develop properties. But in the meantime, he has found steady work as a contractor upgrading offices and remodeling houses.

“It’s a good time for somebody . . . to redo their house, so I’m seeing a pickup in that sort of thing,� he said.

The recession has made it easier to work with subcontractors. “A lot of the subcontractors need the work. . . . They come to me and say, ‘What can I do to get the job?’ �

The recession is also “weeding out . . . a lot of people that got into the business just because they saw people making all this money.�

So far, he has completed five jobs. On a house renovation, he figures that he grosses about $20,000; on an office improvement, $30,000 to $40,000. He said he’s had no shortage of referrals.

Katnik said he’s not afraid to work hard to achieve success. “I do a lot of the work myself, I go out and I meet people, I meet the inspectors, I go down to City Hall,� he said. “Maybe the reason I’m getting more work than some people is because I work a bit harder.�

He shows a visitor the completed renovation of a 6,000-square-foot office space one floor below his tiny office in Redondo Beach. It’s nice, but nothing fancy: gray carpeting, glass offices, new paint, new ceiling. He sweeps up the last bits of debris himself.

He explained that he likes to do that because it gives him a last chance to inspect the work. “When you’re sweeping every corner, you’re looking at the project as you’re going through,� he said. “It would be very easy to pay some worker five bucks an hour and have him sweep out your stuff, but that doesn’t accomplish anything for you.�

While he said he’s managing to stay afloat, he recognizes that times will remain hard for his industry. Still, he believes that he made the right decision. “I had a decent salary, and it would have been very easy to stick with that, and I would probably be still making the same amount of money right now. But I didn’t really have any fears at all about going into this business.�

Ever the entrepreneur, Katnik has other irons on the fire. He manages a couple of apartment buildings and has plans to start a 24-hour fix-it service for homeowners. “The biggest reason why I wanted to start my own business was that I get out of it what I put into it,� he said. “And I don’t think there is a limit to what I can do.�