Why to Start a Startup in a Bad Economy

People starting companies now can choose ideas that lead to profitability rather than "exits" (IPOs and acquisitions). Ideas along the lines of what 37signals does. As long as they do that, one can argue that startups are not any less feasible now than they were last year, as follows. PG's essay of a few years ago on why you should take VC gave as one big reason, Well, you competitors are probably going to take VC (which allows them to progress faster than you can if you do not take VC). The credit crunch makes it harder for you to get VC, but it makes it harder for your competitors, too. Now, what would people do who decide not to found companies? Well, become employees. But the employment market really does get a whole lot more competitive during a big economic downturn, whereas if the analysis I just gave is right, the start-up sector does not (at least the part of the sector in which success is not dependent on an IPO or acquisition does not).

There is a hidden assumption in the above: it assumes that a startup's competitors are other startups, not established firms. Established firms have easier access to credit than startups. (They can fund new lines of business out of profits from existing lines of business, for example, which is a form of "access to credit" for the sake of this discussion, which is about starting new lines of business -- i.e., exploiting new markets.) This is a real disadvantage of startups relative to established firms, and the disadvantage gets bigger because of the economic downturn, but the disadvantage of being an employee of an established firm when lots of job hunters are in the market might get even bigger.

There are ways in which startups have been able to neutralize the funding advantage held by established firms. One big way is to be more agile. "Agility" means adopting new technologies and entering new market more quickly. Changes in technology and changes in markets and potential markets continue to occur during economic downturns.

Paul, I think you are wrong with that one. Who would lend NOW a bunch of (IT) guys money for a startup. A bank ?!?! No! Rather the mob. The reason why Viaweb/MS/Apple were succesfull is that they invented / did stuff that didn't existed at that point. You /They created a market where there was none. Back in these days there was a small amount of technology and a small group of people who understood it. Nowadays it's much tougher with competition from anywhere and anyone has access to loads of information and technology. Regards, Anes

My tiny startup has a small but stable amount of funding. In our case, it's enough to provide a two-year runway to finish development and iterate the product a couple of times before reaching break-even.

Up until this month, I've had trouble finding A-list programmers because I don't offer a large salary and benefits. This month, I've suddenly found it easier to attract high-skill employees and I expect it to get easier still as the recession deepens. Many are involved in loss-generating startups which they anticipate will soon fail as funding dries up. (Not all these experts choose to return to grad school...some, for instance, are too old for that culture shift or don't have liquid assets to sustain them.)

As you discuss, the recession may make it easier or harder for startups depending on their value proposition and their reliance on additional investments. I encourage you to write on how easier access to expert programmers changes the equation. In my case, I must decide whether to commit our resources to, say, hire another brilliant programmer because it's now possible OR to hold at our current headcount to maximize survivability.

Another variable is whether brilliant hires in this economy are likely to stick with the company when the economy improves in, say 12-18 months. An HR expert who's weathered a few of these cycles pointed out that while it's easier to hire good people in a recession, some of these hires are more likely to jump ship when the economy turns around. I think the description would be "fair weather hires".

"The cheaper your company is to operate, the harder it is to kill."

That's one of the most bad ass business quotes I've heard in 2008. Nice PG!

(btw, I started a new company this year and would add that it's much easier to hire GREAT people in these types of markets.)

Thanks for the informative and inspirational message. I linked to it from http://ploneglenn.blogspot.com/2008/10/where-angels-fear-to-...

You are right. It is all about cost containment in times like this and providing a cheaper alternative is the ticket. That is why I started http://www.dynamicalsoftware.com with its flagship product http://www.code-roller.com whose vision is a marketplace of entrepreneurs, evangelists, experts, and enthusiasts of software development that uses time tested, best-of-breed SDLC deliverables and work flow for a higher quality, faster time to market, yet more affordable alternative to getting custom software done.