Starting a Startup in Bad Times?

I stumbled upon this article over our PHPUGPH e-group, which was posted by AJ Batac, and which I could classify as "must read" for technology-based entrepreneurship:

Why to Start a Startup in a Bad Economy
Paul Graham

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. The cheaper your company is to operate, the harder it
is to kill. Fortunately it has gotten very cheap to run a startup, and 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.

http://www.paulgraham.com/badeconomy.html