Coronavirus recession looming? No worries. Economic downturns offer startups certain advantages.
No one knows the ultimate economic impact of the Corona Virus. However, it seems nearly everyone believes a global economic reset is upon us. The current 128-month expansion cycle of the U.S. economy is a record breaker, exceeding the 120-month, 1991 – 2001 economic boom. Don’t despair – it was just a matter of time.
Over the past decade that I’ve interviewed numerous entrepreneurs who have indicated that “now” is always a great time to create a startup, irrespective of the state of the economy.
When I spoke with Marten Mickos, former CEO and Founder of MySQL, he said, “We who are entrepreneurs say, ‘This is the best time ever to start a company.’ We always say it and I believe it.”
When I interviewed Guy Kawasaki during the 2008 recession, he noted that, “…it is cheaper than ever to start a company. People are free or cheap because of the recession. Marketing is free or cheap because of social media. You don’t really buy servers anymore… the tools are all open source. Basically, everything is free. If there was ever a time to start a company, this is it.”
Determining the perfect moment to enter the startup market, whether by creating a company or joining an ongoing venture, is akin to attempting to time the financial markets. According to financial columnist Daniel Solin, “One large study looked at more than 15,000 predictions by 237 market timing newsletters over a 12-year period. At the end of the period studied, 94.5% of the newsletters went bust.”
Economic conditions periodically create headwinds and tailwinds, but it is impossible to accurately time such exogenous factors. As such, if you are about to launch a startup venture, do not despair. Recessions have advantages which startups can leverage to their advantage.
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Ten Startup Advantages From An Economic Downturn
To be clear, an economic downturn is not a blessing. However, negative macro-economic trends are not a valid excuse to delay starting your entrepreneurial career.
1. Survival Is Winning
It may sound counter intuitive, but the greater constraint investors place on their financial resources during a downturn, the better your chances of success, if your venture can self-fund, secure friends and family money or generate adequate revenue from its customers. You might grow more slowly than if you had institutional capital, but if you can weather the downturn, you’ll be well positioned to reap the rewards of the next economic expansion.
Marginal ventures that might be funded in a vigorous economic environment will not attract sophisticated investors’ time, attention or money in a downturn. Fortunately, this reality results in valuable resources being applied to a fewer number of viable opportunities.
2. Hard Knocks University
“You can learn very little from victory. You can learn everything from defeat.” Christy Mathewson, Professional Baseball Player
Mr. Mathewson was correct. Victory usually satisfies, but it seldom educates. Successful entrepreneurs learn far more from setbacks than they do from successes beget by riding out upward economic trends. Economic headwinds require you to be more creative and wily, thereby enhancing your problem-solving toolkit.
Elbert Hubbard, a 20th-century writer, once said, “A failure is a man who has blundered but is not capable of cashing in on the experience.” Blunder away but be sure to learn from each setback. Rising with the tide requires little effort, but it seldom positions you well for the market’s inevitable vagaries.
3. A Loyal Team With Great War Stories
“The only thing that overcomes hard luck is hard work.” Harry Golden, U.S. Newspaper Publisher
Adversity brings teams closer together. Behavioral scientists have proven that the more arduous your collective journey, the stronger your team’s cohesion. For instance, Elliot Aronson and Judson Mills’ 1959 study confirmed that the more adversity a person endures, the greater value they associate with the experience and the higher their degree of loyalty to the team with whom they shared the challenges.
Aronson and Judson concluded that, “…persons who go through a great deal of trouble or pain to attain something tend to value it more highly than persons who attain the same thing with a minimal effort.” As such, a startup team that faces a variety of rigors, before it succeeds, is likely to have a high group affinity and a resulting low turnover rate.
One upside of an elevated unemployment rate is an increase in the overall size and quality of potential employees, coupled with downward pressure on recruiting costs. New hires in a depressed economy also tend to be more willing to accept below-market salaries in exchange for solid benefits and equity-based compensation.
Market uncertainty also tends to reduce the number of wantrepreneurs, as they are generally more reticent to join a startup when their path to riches is less certain. However, a recessionary market also generates a surplus of big company refugees. Such individuals are often desperate and willing to talk themselves into nearly any position that will pay their bills. Although you might get lucky and identify an entrepreneurial star, be wary of hiring folks who’ve been laid off from large organizations.
5. Above The Crowd
“Why march to the beat of your own drummer when you can skip?” Dave May, Professional Baseball Player
Every entrepreneur who has competed in a vibrant market knows that one of the biggest challenges is getting noticed. As the overall industry noise mounts during a boom cycle, it becomes increasingly difficult to attract the attention of journalists, investors, potential customers and would-be partners.
In contrast, success stories are novel in a down market, which generally results in meaningful exposure for those startups which succeed. At Expertcity (creator of GoToMeeting, acquired by Citrix), we received pervasive media coverage as a contrarian success story during the depths of the dot-bomb crash. Although it can be more difficult to extract money from customers’ wallets in an economic downturn, the overall decrease in market activity makes it easier for emerging companies to cut through the clutter and tell their story.
6. Match Value Prop With Market Realities
“A bend in the road is not the end of the road… unless you fail to make the turn.” Unknown
Some startups are well-matched to succeed in economically challenging markets. However, even if your venture is not ideally suited to a market slowdown, you may be able to modify your company’s value proposition to conform to the realities of the market. For instance, a product that enhances productivity can be sold as a revenue generator in an “up” market and as a cost saver in a “down” market.
Selling a cost-saving solution is more difficult in a robust market, as greater value is placed on making money when times are good, as opposed to saving money. However, when survival becomes an immediate goal, products that help companies weather near-term economic storms become especially attractive.
7. Customer Dollars Taste Great
“Money is plentiful for those who understand the simple laws which govern its acquisition.” George Clason U.S. Financial Author
In flush times, startups tend to raise too much money. An excess of capital is often driven by VCs who prefer to stuff as much money as possible into the deals they like. Ventures with excess capital often dither, attempting to craft an ideal solution. In contrast, when wily entrepreneurs are faced with a precarious bank account, they quickly iterate on a minimally viable product, thereby avoiding an over-engineered solution.
Sophisticated entrepreneurs understand that the ideal source of capital is from customers’ wallets, not VCs’ Limited Partners. Not only does such revenue validate the startup’s value proposition, it results in zero dilution. The sooner you generate customer revenue and internalize customer feedback, the shorter your path to self-sustainability.
8. Phoenix Effect
“If you want to succeed, double your failure rate.” Thomas J. Watson, Founder, IBM
A firm that survives an economic nuclear winter is better positioned to take advantage of an economic uptick, as opposed to a startup launched during an economic turnaround.
This was the case with Computer Motion (NASAQ: RBOT, sold to Intuitive Surgical). We entered the medical device market in the midst of a recession. We addressed the market realities by leasing our surgical robots, rather than following the conventional path of selling them outright. We then sold the leases to a finance company, which generated cash to pay our bills, while allowing the hospitals to acquire the robots for a relatively small monthly fee.
If we had stayed on the sidelines, waiting for less market uncertainty, we would have lost the opportunity to file the landmark medical robotic patents that eventually motivated Intuitive Surgical to purchase Computer Motion for approximately $150 million.
9. Measure Thrice, Cut Once
“Failure to prepare is preparing to fail.” John Wooden, U.S. Basketball Coach
That is correct, do not measure twice – measure thrice. A market downturn slows the velocity of everyone’s efforts. This does not give you a license to only work 10-hour days and take off both days every weekend. However, it does afford you the luxury of some deliberation, which is often more challenging to employ during periods of economic frenzy. A heightened degree of thoughtfulness will reduce costly mistakes, such as bad hires, pursuing multiple, disparate markets simultaneously, crafting one-sided partnerships to gain media exposure and making inefficient marketing commitments.
10. Bargains Galore
“The bargain that yields mutual satisfaction is the only one that is apt to be repeated.” Unknown
Top talent is not the only resource you can economically acquire in a downturn. Nearly everything you need to fuel your business will cost you less when times are tough. An entrepreneur’s two most valuable resources are her time and money. A down market results in a much higher propensity for companies to negotiate below their list prices and to even barter for in-kind services. Such markets allow you to creatively craft deals that reduce your costs and conserve your cash.
If your business model is predicated upon a significant marketing spend, a depressed economy can be to your benefit, as publishers are generally willing to heavily discount their perishable ad space.
Pollyanna Need Not Apply
Salmon live most of their lives swimming with the current; however, once they reach reproductive maturity, they make an arduous journey upstream, often jumping up waterfalls, in order to reach the spawning grounds of their birth. Salmon begin their journey when their biological alarm sounds, irrespective of exogenous conditions.
This is the mindset would-be entrepreneurs should have when deciding the right time to jump into a startup. If you wait until macroeconomic conditions are ideal, you may find that your personal situation is no longer suited to either starting or joining an venture.
In the startup world, there is always an upside to an economic downturn. Adversity translates into opportunity for those willing to swim upstream and not wait until the tide turns. Go ahead and jump in, the water feels great.