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