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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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