Why to Start a Startup in a Bad Economy -->
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October 2008
The economic situation is apparently so grim that some experts fear<br>we may be in for a stretch as bad as the mid seventies.
When Microsoft and Apple were founded.
As those examples suggest, a recession may not be such a bad time<br>to start a startup. I'm not claiming it's a particularly good time<br>either. The truth is more boring: the state of the economy doesn't<br>matter much either way.
If we've learned one thing from funding so many startups, it's that<br>they succeed or fail based on the qualities of the founders. The<br>economy has some effect, certainly, but as a predictor of success<br>it's rounding error compared to the founders.
Which means that what matters is who you are, not when you do it.<br>If you're the right sort of person, you'll win even in a bad economy.<br>And if you're not, a good economy won't save you. Someone who<br>thinks "I better not start a startup now, because the economy is<br>so bad" is making the same mistake as the people who thought during<br>the Bubble "all I have to do is start a startup, and I'll be rich."
So if you want to improve your chances, you should think far more<br>about who you can recruit as a cofounder than the state of the<br>economy. And if you're worried about threats to the survival of<br>your company, don't look for them in the news. Look in the mirror.
But for any given team of founders, would it not pay to wait till<br>the economy is better before taking the leap? If you're starting<br>a restaurant, maybe, but not if you're working on technology.<br>Technology progresses more or less independently of the stock market.<br>So for any given idea, the payoff for acting fast in a bad economy<br>will be higher than for waiting. Microsoft's first product was a<br>Basic interpreter for the Altair. That was exactly what the world<br>needed in 1975, but if Gates and Allen had decided to wait a few<br>years, it would have been too late.
Of course, the idea you have now won't be the last you have. There<br>are always new ideas. But if you have a specific idea you want to<br>act on, act now.
That doesn't mean you can ignore the economy. Both customers and investors<br>will be feeling pinched. It's not necessarily a problem if customers<br>feel pinched: you may even be able to benefit from it, by making<br>things that save money.<br>Startups often make things cheaper, so in<br>that respect they're better positioned to prosper in a recession<br>than big companies.
Investors are more of a problem. Startups generally need to raise<br>some amount of external funding, and investors tend to be less<br>willing to invest in bad times. They shouldn't be. Everyone knows<br>you're supposed to buy when times are bad and sell when times are<br>good. But of course what makes investing so counterintuitive is<br>that in equity markets, good times are defined as everyone thinking<br>it's time to buy. You have to be a contrarian to be correct, and<br>by definition only a minority of investors can be.
So just as investors in 1999 were tripping over one another trying<br>to buy into lousy startups, investors in 2009 will presumably be<br>reluctant to invest even in good ones.
You'll have to adapt to this. But that's nothing new: startups<br>always have to adapt to the whims of investors. Ask any founder<br>in any economy if they'd describe investors as fickle, and watch<br>the face they make. Last year you had to be prepared to explain<br>how your startup was viral. Next year you'll have to explain how<br>it's recession-proof.
(Those are both good things to be. The mistake investors make is<br>not the criteria they use but that they always tend to focus on one<br>to the exclusion of the rest.)
Fortunately the way to make a startup recession-proof is to do<br>exactly what you should do anyway: run it as cheaply as possible.<br>For years I've been telling founders that the surest route to success<br>is to be the cockroaches of the corporate world. The immediate<br>cause of death in a startup is always running out of money. So the<br>cheaper your company is to operate, the harder it is to kill.<br>And fortunately it has gotten very cheap to run a startup. A recession<br>will if anything make it cheaper still.
If nuclear winter really is here, it may be safer to be a cockroach<br>even than to keep your job. Customers may drop off individually<br>if they can no longer afford you, but you're not going to lose them<br>all at once; markets don't "reduce headcount."
What if you quit your job to start a startup that fails, and you<br>can't find another? That could be a problem if you work in sales or<br>marketing. In those fields it can take months to find a new<br>job in a bad economy. But hackers seem to be more liquid. Good<br>hackers can always get some kind of job. It might not be your dream<br>job, but you're not going to starve.
Another advantage of bad times is that there's less competition.<br>Technology trains leave the station at regular intervals. If<br>everyone else is cowering in a corner, you may have a whole car to<br>yourself.
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