Are Startups Recession-Proof?
Nov 26, 2012
Common sense dictates that founding a startup during a recession is a bad idea. In fact, in 2007, there were 844,000 new startups in the United States. By 2009, that number had fallen to just 700,000, according to the Bureau of Labor Statistics. People tend to hunker – not double – down in a crappy economy.
But let me ask you this: Microsoft. LexisNexis. Hewlett-Packard. MTV. What unites them?
Want a hint? Not only are they all legendarily successful, but they also all got their starts during bear markets.
This may at first seem counterintuitive: surely the best time to start a company is at an economic peak, rather than what seems like a pretty bleak valley? But – and especially for startups – this is not the case.
It is easy to see the downside of starting a company during an economic downturn: tighter credit. Weak assets. Skittish investors. Conservative consumers. Thinking on these conditions might cow even the most ambitious would-be founder. But there are upsides to tough economic times as well. And startups are uniquely suited to take advantage of them.
Lean is better
A slow economy incentivizes efficiency. This is great news for startups. Your startup shouldn’t be a request for consumers to spend more money, but an opportunity for them to spend the money they have better. At Speek, we’ve come up with a product that allows for cheaper and easier conference calls. From encouraging telecommuting to maximizing the hours in a business day, we save our customers time and money. And the value of that savings is more appreciated during an economic downturn, not less.
This emphasis on efficiency is good for startups internally as well. During booms, when money is being thrown around with euphoric promiscuity, it is easy to take your eye off the bottom line. Why save pennies when Benjamins, Grovers ($1,000), and even Woodrows ($100,000) are all just the next easy venture round away? But when you get started in leaner times, your startup starts leaner. This isn’t even a blessing in disguise; it is a blessing pure and simple. Gone are the days when hotshot startups “bragged about their rabid ‘burn rates’” and competed in a game of chicken to see who could come closest to the fiscal cliff without bailing. When there is more room for error, we tend to make more errors. By getting started now, you won’t need a panicked CFO to rein in risky spending; the economic climate will do it for you.
Bad habits are easier to avoid than to unlearn
This means that as the economy grows (and it will), your startup will be primed to grow with it, unburdened by the excess weight of fossilized extravagances that are maintained just because “that’s the way we’ve always done it.” More than one startup has flamed out because its founders had eyes that were bigger than their stomachs: they said “yes” to all growth – at any time, of any size – without considering if it was in keeping with their philosophies, with their long-term goals. Even worse, some of those companies allowed those philosophies to get buried, and those long-term goals to get shuffled and changed, blurred by the onslaught of easy cash. For a startup, this is death. You can get a duck nice and fat, all very quickly, by shoving a funnel down its gullet and force-feeding it corn. But it’s not that good for the duck.
Don’t get me wrong: at Speek, our number one goal in life is weekly growth. Right now that’s active user weekly growth. Soon that will be weekly revenue growth. Eventually that will be weekly profit growth. But this is managed (and manageable) growth. We know where we want to go, but we also know how we want to get there. By starting up during a weaker economy, you can be sure that you won’t have to unlearn bad habits later, because those habits will never have materialized in the first place.
Great products matter, no matter what
An argument that looks simple on its face: bad economic times are bad times to start a company. It is simple, and it is certainly true for some types of businesses. But it is not true for startups. Where startups are concerned, great products matter. Bad economies don’t. Again, be the way your customers spend their money better. The time for a great idea is always now. And remember, your great idea is only yours until somebody else capitalizes on it first. Just make sure that it’s great.
You are the economy
One more thing: from a startup perspective, it is easy to forget that your company is not only affected by the economy, but also part of the economy. Saying “we can’t start a company right now, because the economy is bad,” is like saying “we can’t build a roof right now, because it’s raining.” At Speek, we are working to build a $1 billion-plus company that creates many, many jobs for people regardless of how bad the economy is. If we can achieve this goal, not only will we and our investors be better off for it, but so too will our clients, and so too will the economy.
Innovators innovate. Founders found startups. That’s what we do. Don’t ever let economic conditions get in the way of changing the world.