People have asked how I maintain an optimistic attitude during this recession.

Simple, my job as a lawyer for entrepreneurial companies brings me into daily contact with people who usually see the glass half full, not half empty. It matters who you hang with.

I see positive trends because I hang with positive people. Not everyone is hiding in bed with the blankets over their heads crying about lost 401(k) money.

While media headlines screamed "Depression!" during January, I had five calls from entrepreneurs about starting new companies. So it's easy for me to be optimistic while I'm talking to the next generation of companies that will rebuild our economy.

But aren't these people crazy? Don't they know they're doomed? Shouldn't we protect them from themselves? Why not outlaw new companies until the recession ends?

That line of thought goes against human nature. Downturns always stimulate new companies, and tough times historically have been better for startup companies than most people think.

Why?

• First, necessity is the mother of invention. As big companies cut their work forces, laid-off workers focus on starting over. Some inevitably find it attractive to be their own boss and have more control over their lives. That often leads to innovative ideas they wouldn't otherwise have pursued.
  
  
• Second, opportunity cost is lower in downturns. In good times, company founders give up more cash flow than in economic downturns. They also give up perceived job security. As people watch their co-workers being fired, they often conclude that job security is a myth. So why not swing for the fences by starting a company.

That explains motivation, but motivation alone doesn't ensure success. Why start something that's likely to fail?

Most new companies fail, whether they start in good times or bad times. It's always difficult to build successful companies. However, starting during downturns provides several key advantages.

• First, talented people are the key to business success. It's easier to attract good people during downturns.
  
  
• Second, current market conditions are irrelevant to many new companies. For example, if a product needs research and development for a year or two before market launch, economic conditions after the product is developed and launched matter a lot more than economic conditions when the company starts. Most economic downturns last less than two years. Therefore, new companies launched during a downturn often catch the economy in an upturn when they launch their products.

Another positive for starting during downturns is ROI. Venture capital industry investment returns data over the past several decades confirm that venture fund ROI is higher for investments made during poor economic times than during boom periods.

That's possible because ROI depends on valuations only when each investment is made and at the exit date. As valuations usually are lower during bad times, downturn investors start with a substantial advantage in the ROI game compared to boom-time investors. If they exit at the same time, the downturn investor wins greater ROI. That's why some investors seek out down sectors and ignore hot sectors. Whether you call them value investors or vultures, they often produce high returns.

That works fine for investors, but what about company founders? Aren't they hurt by low valuations when they start companies? In theory, yes, but several factors work to limit the downside for company founders.

• First is investment size and timing. Because it's difficult to raise money during downturns, most investments are small or are delayed until the economy starts improving. Founders often bootstrap through downturns. Stock markets generally are priced on expected future earnings, not on the past. Therefore, stock valuations generally start improving six months before economic recoveries. Likewise, venture investment valuations tend to bottom out early and improve over time. Professional venture managers are hired by institutional investors to identify and make investments. Staying on the sidelines too long makes everyone nervous.
  
  
• Second, when money is easy to get, companies spend it faster. Downturn companies tend to be more frugal and get more bang for the buck. While investment valuation plays a role in determining how much value founders retain at exit, the amount of money raised is a bigger factor. Companies that raise less money, because they spend less, generally provide better value to founders.
  
  
• Third, downturn companies often face less competition in their early stages. Boom-time companies can raise capital easily, but so can their competitors. Pioneers often quickly face dozens of copycat competitors, who raise tens of millions of dollars to surpass the initial leader. Downturn companies often have markets to themselves for longer periods than their boom-time counterparts.
  
  
• Fourth, economic downturns often create market disruptions that weaken established market players and afford opportunities for new competitors.

So, the bottom line is that entrepreneurs always face tough struggles. Think twice before you quit your day job to start a company. However, don't tell your neighbor he's crazy when you hear he's starting a company in this recession. Your neighbor may just be your next boss.