Why to Start a Startup in a Bad Economy

(…)  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.

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.

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.

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.

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.

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.