Venture: Is starting a business in a downturn crazy - or savvy?

Karen and Brian Brunhofer are doing something many people say is nuts. They started a homebuilding company in the midst of a prolonged housing slump.

July 11, 2011

By Ashley Gross and Alex Keefe

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Against the backdrop of a poor job market, more people are making their own jobs, starting up businesses, even in industries that might surprise you. Brian Brunhofer is showing off his company's first home under construction.  Wait a minute, did he say home? Under construction?

BRUNHOFER: We started this house about 30 days ago. We’ve done first and second-floor framing.

The homebuilding industry has fallen off a cliff, so who thinks, 'Yeah, now’s the time to start a homebuilding company? Now’s the time to put up more houses?'

Brian Brunhofer and his wife Karen do. They started their own company, Meritus Homes, a year ago.

That’s after their executive-level jobs with one of the nation’s biggest homebuilders, Pulte, were eliminated.

Karen says land prices had dropped so low they jumped on the chance to go into business for themselves.

KAREN BRUNHOFER : We saw a unique opportunity to go in and start buying really good locations, where there’s great accessibility to transportation and employment, the school districts were good and there wasn’t a lot of supply in the area. And we were buying them at the distressed current pricing versus at the boom time.

So actually when you think about it, from that perspective, it makes sense.  They can buy low from other builders and banks who want to bail on their projects.

That’s what happened here in this subdivision in the northwest suburb of Inverness.

KB Home pulled out and the Brunhofers came in, buying 27 empty lots, with another real estate partner.

Okay, the supply side adds up, but what about the demand side?

The number of new homes selling these days is just a quarter of what it was in 2005. New home sales have risen a bit this year from last year but are still lower than half a century ago. Brian says they weren’t pollyannas about a market rebound.

BRIAN BRUNHOFER: We were very realistic in putting together a business plan that said we can sell one a month at this price and that has been something that has met our expectations.

STEVE ROGERS: If you can find the market that will buy your homes, why not pursue that right now? 

I went to see Steve Rogers to get his perspective. He teaches entrepreneurship at the Kellogg School of Management at Northwestern. I wanted to know if a downturn, like the housing morass we’re in right now is a good or a bad time to start a company.

ROGERS: History shows that during tough times, entrepreneurial ventures actually increase. And we see, for example, historically that companies in the Fortune 500 like Eli Lilly, RadioShack, Burger King, Microsoft were founded during tough economic times. So some advantages to starting a company during a downturn - one, you have a bigger pool of employees to pick from. During a downturn, as we all know, unemployment is high and therefore you can hire the best of the best at good prices. So that's one of the advantages. Another advantage is that we see more capital being available for entrepreneurs, especially in the private equity category and the equity category. You know, we had an issue with debt capital being somewhat limited to us, but more equity capital is available because of how the public markets are responding to entrepreneurial ventures like Groupon, the fastest-growing company that in fact was started during a downturn.

GROSS: What about people's ability to spend? A lot of people don't have work, they don't have a ton of money.

ROGERS: Entrepreneurial ventures will be successful because they're different, and if you start something different and it meets a market need, even during a downturn when people don't have loads of cash, you still can prosper. Yes, you may not be able to get people spending lavishly, but even during tough times, we look at companies like Whole Foods - and I call it 'Whole Paycheck' - very expensive products that they sell, and right now they're booming. So just because there's a downturn does not mean that people will not spend.

GROSS: I'm thinking of people who might be listening to this who are saying:  I'm just scraping by, I can't even contemplate starting a company now. What about those people?

ROGERS: The reality is these are tough times, these are scary times, my resources are limited, but some people may be faced with no other option and that is - when you don't have the option to take a job, your focus has to be on making a job for yourself and possibly even others.

Karen and Brian Brunhofer made their own jobs and now have four employees. Karen says quite a few people have told them they’re crazy to start up now.

KAREN: I think some people think this was not the right time, I think we think the exact opposite. 

They say so far they’re on track with their plan, lining up buyers at a rate of about one a month. And Karen says more people tell them working with your spouse may be even crazier than starting a homebuilding business in the middle of a housing slump.

I’m Alex Keefe, with our Windy Indicator, where we measure the larger economy by examining one fragment of it. This week…Actually, this one’s intended for mature audiences only, so I’ll give you a second to send the kids out to play.

So, we adults have all heard the adage “sex sells.” But for the pornography industry right now – it’s more like “sex gets stolen.”

PHELPS: When we’re trying to charge money for a product, if somebody’s giving it away for free – because they stole it – that kills everybody.

Jesse Phelps, with hotmovies.com, was one of several porn industry pros at the traveling Exxxotica expo that stopped in Rosemont over the weekend. 

And when you got away from the throbbing music, the women dancing in cages, the vendors selling unmentionables, a lot of the talk was about piracy.

That’s due to the recent proliferation of so-called “tube sites,” websites that rip down copyrighted skin flicks, then post them online free of charge. About the same time tubes were sprouting up, the recession was cutting into porn sales.

The combination has caused big headaches for porn production houses like Evil Angel, where Justin Rich is a sales manager.

RICH: Our company has hired an agency, and all they do all day is go online and they send cease and desist letters to the tube sites and make them take everything down.

Nevertheless, the porn industry’s trade group says, in the last few years, revenue declines of 40 to 50 percent have been commonplace.

ANGEL: When you steal music, it’s a pain in the ass. When you steal porn, it is so easy.

Porn starlet Joanna Angel – she goes by her stage name – is taking another tack: make people want to pay.

ANGEL: It’s like the answer to the problem for not making as much money is to spend three times as much money to hope to not lose what we have.

While other companies fight piracy, she says hers is investing in high-definition video, social networking, and live chat rooms.

And she says it’s working.

ANGEL: I am a business woman. I just like to take my clothes off and, like, have sex with people on camera sometimes. (laughs)

Next week on Venture:  Ah, the adventures of first-time home buying.