Starting Up In A Downturn - 10 Reasons To Start A Company In An Economic Downturn

Fish CycleSalmon 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 do not decide to make their epic trek based upon weather conditions, the flow rate of the streams they must traverse or even how far they happen to be from their destination. Rather, they begin their journey when their biological alarm sounds, irrespective of exogenous conditions.
This is the same mindset that would-be entrepreneurs should have when deciding the right time to jump into the startup world.

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Attempting to determine the perfect time to enter the startup market, whether by starting or joining an adVenture, is akin to trying to time the financial markets. Those who attempt to do so find it is a consistently doomed strategy. 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.”

Timing is everything in comedy and in life. When deciding the right time to enter the startup world, the timing that matters most is your personal, nanoeconomic timing – the financial and non-financial facets of your life that will be impacted by entering the world of startups. Just like there is never an “ideal” time to get married, have children or buy a house, there is never an “ideal” time to start a company or join a startup. If your nanoeconomics are aligned, then assess the microeconomic issues associated with the various markets that will impact your startup. If the microeconomic factors are not in your favor in a particular market segment, it may be possible to shift your focus to a healthier, more conducive market. If your personal timing is right and you can identify favorable microeconomic markets, the broader macroeconomic issues are largely irrelevant to your “startup timing” analysis.

I am not suggesting that an economic downturn is a blessing to be cherished. Clearly, a strong wind at your back can be greatly beneficial when launching a startup. However, an economic downturn is also not a valid excuse to delay starting an entrepreneurial career. Even in a recessionary market, there are good reasons to begin a startup in a downturn, as outlined in the following list.

Ten Reasons To Startup In A Downturn

  1. Increased Probability of Success

It may sound counterintuitive, but the greater constraint investors place on their financial resources during a downturn, the better your chances of success, given (of course) that your adVenture is able to either secure funding or generate adequate revenue from Customers, as described below in #7 - Customer Dollars Taste Great.

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 more of these valuable resources being applied to a fewer number of viable opportunities. If your adVenture does not receive funding and you are unable to operate on customer revenue, then the Darwinian world of business (as described in Competing From The Fringe) is trying very hard to tell you something – be sure to listen.

It may be frustrating to attempt to raise money in an economically challenging market. However, such conditions may actually grant you a reprieve from years of struggle at a “living dead” startup that never should have been funded in the first place.

  1. Hard Knocks U

“You can learn very little from victory. You can learn everything from defeat.” Christy Mathewson, Hall of Fame pitcher

Christy was correct. Victory usually satisfies, but it seldom educates. Successful entrepreneurs learn far more from the bumps in the road than they do from effortless successes. Thus, the more creative and wily you are forced to become, the more your problem-solving toolkit will grow.

Elbert Hubbard, a 20th-century writer and artist, 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 experience so that when you graduation from Hard Knocks University, you will have a masters degree in Down-Market Survival Tactics. Rising with the tide requires less effort, but it seldom positions you well for the inevitable market downturns.

  1. Great Campfire Stories

“The only thing that overcomes hard luck is hard work.”
Harry Golden, newspaper publisher

As noted in the Dirty Team Building, adversity can bring your team closer together. A company that perseveres and succeeds in a challenging market will have a much greater probability of success, once the market becomes more robust. Behavioral scientists have proven that the more arduous your collective journey, the stronger your Core Team’s cohesion.

A 1959 study by Elliot Aronson and Judson Mills 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 challenging experiences. Per their study, Aronson and Mills required some subjects to suffer extreme embarrassment, before allowing them to join a discussion group that, by design, was “worthless.” The subjects who faced an arduous task in order to join the group consistently rated the discussion group highly. In contrast, control subjects who were allowed to join the group without completing difficult or embarrassing tasks consistently rated the very same discussion group as “worthless.” Aronson and Judson conclude 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.”

This phenomenon is seen in the numerous initiation ceremonies of primitive tribes, as well as hazing associated with fraternity pledge programs. If something is hard to obtain, we assign greater value to it. As such, a startup team that faces a variety of rigors in order to succeed is likely to consist of motivated employees that have a high group affinity and a resulting low turnover rate.

  1. Take A Dip In The Brimming Talent Pool

If you think hiring professionals is expensive, try hiring amateurs
author unknown

One upside of a downturn is that the overall size and quality of the potential employee pool increases substantially. New recruits also tend to be more flexible and willing to accept below-market salaries in exchange for equity-based compensation. Troubling economic times also heighten the effectiveness of the Blondin Test. People who are willing to join your team during an economic crisis are more likely to have a risk and reward profile that is suited to an adVenture.

Market uncertainty also tends to weed out Wantrepreneurs, as they are generally more reticent to join a startup when their personal path to riches is less certain. However, a recessionary market also generates a number of Big Dumb Company (BDC) 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 Gem, be wary when interviewing BDC refugees, as they may not have the appropriate personality or risk profile to add value to your adVenture over the long term.

  1. Above The Crowd

“Why march to the beat of your own drummer when you can skip?”
Dave May, blogger

Every entrepreneur who has competed in a vibrant market knows that one of the biggest challenges is getting noticed. As the overall “noise level” of the market mounts, it becomes increasingly difficult to attract the attention of Messengers, Donors, investors, potential customers and would-be partners.

Success stories are less common in a “down” market, which generally results in meaningful exposure for those startups that succeed. GoToMyPC received tremendous media coverage during the depths of the dotbomb crash, in part because it was a contrarian success story in the midst of a high-tech wasteland. 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 small companies to cut through the clutter and tell their story, as described more fully in PR Passion

  1. 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.”
Author unknown

Some startups are well-matched to succeed in economically challenging markets. However, even if your adVenture is not ideally suited to a market slowdown, you may be able to modify your company’s value proposition to conform to the demands of a downturn. 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 in a recessionary market.

In addition to the success of our GoToMyPC consumer offering during the high-tech recession of 2001 - 2003, we also sold a substantial number of licenses of our enterprise-based customer support solution, GoToAssist. By demonstrating a clear return on our customers’ investments, in the form of shorter and more effective customer support calls, we closed a number of substantial sales with Fortune 1000 companies that had otherwise “frozen” their technology infrastructure budgets.

  1. Customer Dollars Taste Great

“Money is plentiful for those who understand the simple laws which govern its acquisition.”
George Clason, financial author and publisher

In flush times, many startups raise too much money. An excess of capital is often driven by venture capitalists (VCs) who tend to stuff as much money as possible into deals they especially like, as they want to own as large a percent of such ventures as is reasonably possible. Sophisticated investors understand that the ideal source of capital is from customers’ wallets, not VCs’ bank accounts. Not only does such revenue validate the startup’s value proposition, it results in zero dilution.

As Guy Kawasaki notes in The Art Of The Start, sometimes “good is good enough.” When companies are not forced to bootstrap their operations, there can be a tendency to dither about and attempt to craft an ideal solution. However, when faced with a precarious bank account, many ventures are forced to quickly develop a Minimally Viable Product before they have a chance to over-engineer it. The sooner you generate customer revenue and incorporate customer feedback into your solution, the faster it will become competitive, thereby enhancing your ability to thrive without a stockpile of investor funds.

  1. Phoenix Effect

“If you want to succeed, double your failure rate.”
Thomas J. Watson, IBM Founder

A firm that survives an economic nuclear winter is much better positioned to take advantage of an economic uptick, as opposed to a startup that does not launch until an economic turnaround has begun to manifest itself.

This was the case with Computer Motion. We entered the medical device market during the recession of the early 1990s. The medical market was particularly challenging, as Hillarycare caused a great deal of uncertainty, resulting in most hospitals keeping their checkbooks firmly closed.

We addressed these market realities by leasing our surgical robots, rather than following the conventional path of selling them outright. We sold the leases to a finance company, which provided us with a lump sum of cash and allowed the hospitals to purchase the robots for a relatively small monthly fee. Leasing conformed our sales approach to match the hospitals’ fiscal realities, while still generating the cash we needed to operate our business.

If we had stayed on the sidelines, waiting for a more ideal market environment, 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.

  1. Measure Thrice, Cut Once

“Failure to prepare is preparing to fail.”
John Wooden, 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 give you the luxury of some degree of 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, one-sided partnership agreements and expensive marketing commitments.

  1.  Bargains Galore

The bargain that yields mutual satisfaction is the only one that is apt to be repeated.
author unknown

Top talent is not the only resource you can economically acquire in a downturn. Nearly every resource needed to fuel your business will cost you less when times are tough. As noted in Beware The Consultant, 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 a market allows you to creatively craft deals that reduce your costs and help you 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, rather than allow it to go unsold. During the dotbomb bust, we were able to negotiate very aggressive Cost Per Acquisition (CPA) deals with a number of major publishers, including those that publicly declared that they, “never did CPA deals.” Such agreements were a boon to GoToMyPC, as it allowed us to limit our payments to bounties for each new customer acquired. This allowed us to conserve our cash and invest the revenue generated by each new customer into acquiring additional customers.

Pollyanna Need Not Apply

Most companies do not succeed by executing the business plan that they initially implement. As such, there is seldom anything to be gained by waiting for an “ideal” time to enter the startup realm. Even if you perfectly time the microeconomic market(s) associated with your initial business plan, the timing might or might not be ideal within the unforeseen markets which comprise your ultimate go-to-market strategy. Thus, even if the current market conditions appear attractive, they may become irrelevant as your business model morphs to conform to future market realities.

Your personal clock is ticking, irrespective of macroeconomic events, which are out of your control. As described in What If?, if you wait until macroeconomic conditions are preferential, you may find that your personal situation is no longer suited to either starting or joining an adVenture. With the passage of time, your risk profile may be compromised by having to support a family or pay a mortgage.

Dead SalmonSalmon die soon after they complete their laborious trip upstream, and ultimately serve as fertilizer for their offspring. However, unlike salmon, once your upstream trek is completed, you can swim downstream with the current, and enjoy the momentum associated with an economic upswing.

In the startup world, there is always an upside to a 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.

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Copyright © 2007-9 by J. Meredith Publishing. All rights reserved.

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John Greathouse is a Partner at Rincon Venture Partners, a venture capital firm investing in early stage, web-based businesses. Previously, John co-founded RevUpNet, a performance-based online marketing agency sold to Coull. During the prior twenty years, he held senior executive positions with several successful startups, spearheading transactions that generated more than $350 million of shareholder value, including an IPO and a multi-hundred-million-dollar acquisition.

John is a CPA and holds an M.B.A. from the Wharton School. He is a member of the University of California at Santa Barbara's Faculty where he teaches several entrepreneurial courses.

Note: All of my advice in this blog is that of a layman. I am not a lawyer and I never played one on TV. You should always assess the veracity of any third-party advice that might have far-reaching implications (be it legal, accounting, personnel, tax or otherwise) with your trusted professional of choice.

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