Why Startups Should Launch During A Recession
A bad economy doesn’t mean it’s the wrong time to launch that idea you’ve had
The tech world has enjoyed a fruitful recent decade with a growing economy and more startups than ever before.
With a healthier ecosystem to support startups, including resources, incubators, and funding, it’s no wonder we’ve seen tremendous growth over the last ten years.
In recent months, however, we’ve seen a shaky economy due to the pandemic. With uncertainty growing and a potential recession hitting if the market crashes again, startups are feeling the pressure during this tough time.
So why launch a startup in this climate?
You might be thinking, you just said a bunch of negative things, so why would starting a new company be any good?
According to Paul Graham, legendary entrepreneur and VC (well known for starting Y Combinator, the accelerator that had startups like Airbnb and Stripe in its cohort), a good time to begin a company is during a bad economy.
On top of this, in one of the recent TWIST podcasts (Jason Calacanis) he also talks about how starting a podcast in our current climate isn’t necessarily a bad thing.
It’s more to do with the founders and your product
When Stewart Butterfield failed on his gaming startup, investors believed in him because of his track record of creating successful startups (Flickr). He ultimately pivoted and created what’s known as Slack today.
Having resilient and focused founders to execute a brilliant idea is more important than trying to worry about external factors outside your control.
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. — Paul Graham
Although launching a startup isn’t necessarily the best thing to do during a bad economy, as Graham mentions, but it doesn’t mean it’s better to do so during a good economy too.
Let’s go through why starting a startup during a recession can still mean a good thing.
Fewer competitors in general
During a downturn, you’re going to see less competition within your product segment. You’ll encounter not only less early-stage competitors but also ones in the market already that might go bankrupt or fail during a recession.
In the ripe early stages, you’re also going to need fewer resources to maintain and grow your business. Those already in the market may have costs like overheads, human capital, and running debt. If they aren’t in a position to maintain cash flow, it might spell doom for these startups.
This means you have a chance to grow your business without worrying as much about more companies capturing your potential customers.
This is especially valuable if the product you’re creating helps save money or at least solves a major pain point. This is because your customers are looking for any method to reduce costs in a downturn, so if your product can do this, you’re solving a big potential headache.
Cheaper marketing costs and less noise
Less competition also means marketing and growth tactics become cheaper. As fewer companies are competing for ad space, buying ads on Google, Facebook, and even LinkedIn become less expensive with lower demand.
This means if your CAC (Customer Acquisition Cost) was initially unsustainable through paid media, within a downturn, it could become a viable channel, at least in the short run.
There are also many more chances to grow your startup with less noise in the market. This means getting potentially more exposure from the beginning, which can result in you getting your business off the ground quicker.
Less competition for talent
On a final note around less competition, this can also mean larger talent pools for hire.
Without as many competing offers for skilled engineers from not only your big tech companies like Google and Facebook but also your next tiers of tech like Slack and Airbnb, you have the chance of nabbing someone that could shine, especially if you have some capital.
Generally, in a downturn, many value job security over other perks.
As long as you can assure this, it’s a great time to find good employees. Being able to secure talent early can make the difference in building a great product quickly and efficiently.
You can still get funding
Even better, if you’re worried about funding, looking at the graph below, according to the last recession, the amount of angel and seed funding continued to grow (although VC funding dipped).
Although the deal values were much smaller (and you might get reluctant investors, especially if you’re a first-timer), it still shows that you can still get that early funding needed to kickstart your startup if required.
Arguably, raising money during an upward market isn’t necessarily easy too. As mentioned before, with fewer competitors, you have less competition for money as well.
If the economy is good, even though there might be more money, you’re trying to get funding so while fighting thousands of other startups going after the same pool of money.
It all points back to you and your product
In the end, even both negative and positive reasons, everything points back to the founder.
As a founder, especially if you think your market needs your tech, the time to start is now.
You can never predict the best time to start a company, but you can control who works in your startup and what product you build.
Being resilient and building an awesome product shows your grit and demonstrates your ability as a founder to execute on a pain point, you believe exists.
Others have done it, so there is no excuse
As Jason Calacanis puts it in one of his recent podcasts, investments are made in the downturn and collected in the upmarket.
There is a tonne of resources out there, and there should be no excuse.
Here is a list of great companies that became Unicorns and were incepted during the GFC of 08 and 09:
- Airbnb (private; $38B, 2019)
- Pinterest (public; $14B, Oct 2019)
- Beats (acquired by Apple for $3B in May 2014)
- Yammer (acquired by Microsoft for $1.2B in July 2012)
- Uber (public; $54.6B, Oct 2019)
- Square (public; $26.9B, Oct 2019)
- Slack (public; $12.5B, Oct 2019)
- Nutanix (public; $4.9B, Oct 2019 )