Why to Start a Startup in a Bad Economy

Why to Start a Startup in a Bad Economy. An essay by Paul Graham, October 2008.

Autumn 2008

Graham wrote this in October 2008, as the financial crisis hit. Some experts feared the worst slump since the mid-1970s.

But look at what was founded in that slump: Microsoft, in 1975, and Apple, a year later.

So is a slump a bad moment to start? Not really, nor an especially good one. The economy barely moves the needle.

It's the founders

So what does move it? After backing many startups, Y Combinator saw a clear pattern: it's the founders.

Next to the founders, the economy is a rounding error. Strong teams win even in a slump, and weak ones lose even in a boom.

Waiting out a slump is the 1999 mistake in reverse, when people thought any startup would make them rich. Both bet on the economy.

Want better odds? Worry about finding a great cofounder, not the economy. Your biggest threat isn't in the news. It's in the mirror.

Why waiting doesn't pay

Still, shouldn't a team wait for a recovery? For a restaurant, maybe. For a technology company, Graham says no.

Technology advances whatever the stock market does, so an idea's moment comes on technology's schedule, not the economy's.

Microsoft began with Basic for the Altair, an early personal computer. That fit 1975; a few years later, the moment would have passed.

You'll have other ideas. But if there's one you really want to build, build it now.

Pinched customers

The economy isn't irrelevant, though. Customers and investors both feel the pinch.

Pinched customers want to spend less, and startups often sell exactly that: a cheaper way to do things. That's an edge over big companies.

Fickle investors

Investors are trickier. Startups need their money, and in a slump they get cautious, which Graham thinks is backwards: slumps are when to buy.

The catch: a boom just means everyone wants to buy. Being right means going against the crowd, and most people are the crowd.

So in 1999, investors rushed into bad startups. In 2009, they'd likely shy away even from good ones.

Founders just adapt. In 2007 investors wanted viral; in 2009, recession-proof. Both are good. The mistake is fixating on one.

Be a cockroach

Luckily, recession-proofing takes nothing special: spend as little as you can, as you should anyway. Graham's long-standing advice? Be a cockroach.

However a startup dies, the final blow is the money running out. Spend half as much, and you last twice as long.

And running a startup has become very cheap. A recession, if anything, pushes costs lower still.

Safer than it looks

In an economic nuclear winter, a cockroach startup may be safer than a job: a layoff takes all your income at once; customers leave one by one.

What if it fails, and no one's hiring? In sales or marketing, a job hunt in a downturn can drag on for months.

Programmers have it easier: good ones can always find some work. Maybe not the job you want, but you won't go hungry.

Fewer rivals, cheaper stock

Bad times also mean less competition. Technologies leave like trains on a schedule, and if everyone's hiding, you may get a car to yourself.

Founders are investors too: you buy your stock with work. Larry Page and Sergey Brin got rich mainly as Google's first investors.

So follow the rule every investor knows: buy when things look bleak.

The time is now

Shaking your head at those timid investors? Founders flinch too. In bad times, many would-be founders go to grad school instead.

And that's exactly why the opportunity is real: most people won't act on it.

So should you start in a recession? Maybe. Do fewer rivals outweigh warier investors? Hard to say, and it barely matters.

What matters is the people. If you have the team and the technology, there's no better time than now.

In short

The economy barely matters. Founders decide a startup's fate.

Technology won't wait for a recovery: act on a good idea now.

Run cheaply, like a cockroach: the less you spend, the harder you are to kill.

Slumps bring fewer rivals and warier investors, but the people matter most.

The original is short, and better than this. Read it: paulgraham.com/badeconomy.html