Your friends and family will tell you that you're crazy, your spouse will shudder, and you'll find it difficult to extract the key people you need from their safe and secure positions, but a recession is exactly when you should start a new technology company. The timing couldn't be better.
Why, you're probably wondering, would anyone start running up their credit card balance, borrow money from friends and family, and generally put themselves at risk when the general economy is in such a bad state? It's the lead time. Let's use the graph to the right as a proxy for the "state" of the economy; it's the variation from the log growth of the GDP. You can see the cyclicality of the market and the wave length is about five to seven years. Moreover, while it's certainly not predictable, it has oscillated quite nicely. (For more on this see: Wikipedia on "Real Business Cycle")
Starting any company is difficult, regardless of the economic times one starts in or the scope of the project. Yet, holding the cyclical nature of the economy in one's mind, consider that starting during a recession may be exactly the right time to make the plunge. Just as you're getting to maturity, the cycle may improve. While you're growing your company, everyone else is hurting, shedding good people and leaving their markets relatively undefended. One might think, given I invest in extremely early stage companies, that this is a bit self-serving. Hear me out and make your own decision.
What a start up company needs is:
1) A great idea - one with size, scope and power
2) A great team - one with experience, drive and stamina
3) A great market - one with size and a dearth of competition
First, ideas for companies occur to entrepreneurs in a rather haphazard manner, over a meal, while out for a run and in conversations with interesting people. Their emergence is unpredictable. As a result, there will never be a good economy or a poor one for the idea. Timing is impossible. Item one is going to happen when it happens, and you'll need to test your idea against all the measures of market size, value to customers, competition, and the myriad other items that all ideas must be measured against to insure it's really a great idea around which to build a company.
Second, a great team is difficult to build. The team must have the right blend of intelligence, stamina, experience and guts it takes to form a new company. What is most difficult is that the best people are already busy doing something else. One really doesn't want the folks who are simply sitting around, readily available and awaiting some entrepreneur. Thus, you'll have to entice the best people, away from well paid jobs they enjoy and are good at, to join you in your risky quest to build a company. Ask yourself: "Will this be easier during a boom or a recession?" Don't believe me, go talk to some target people. Ask them how they feel about their current company now and recall what they said about it in 2006 as things were booming. You'll conclude that during a recession exactly the sorts of people you want are much more available to a start up company that is based on a great idea, with a great team, in a great market.
Third, what happens to markets during recessions. Certainly, people buy fewer things and kick off fewer exploratory projects. This illustrates an important point about the sort of idea that drives a new company. If the company's idea is simply a faster, better and cheaper version of something that can be done today, it's not a great idea. The great ideas that build great companies are those that solve a problem that simply can't be solved by current solutions. It has no competitors and it addresses a problem that customers really have. Of course, this would eliminate a large number of the companies that have been funded over the last decade, but I will stand by my assertion that they aren't the sort of company that will win out in the long haul to building a sustainable durable great company.
During a recession customers still buy things and services that solve their real problems. Indeed, they are even more motivated to solve these problems than they were when holding to the status quo was supported by the largess of a flush market and fat profits. When the customer is fighting for every dollar of profit to simply survive and you turn up with a solution to a real problem that helps them survive, what do you think they'll do? They buy. Thus, while marginally good ideas and small incremental improvements in products can be used to start modest companies during good times, in a recession only the great idea can succeed; and this is a good thing. The discipline of the recessionary market forces us all not to waste our time on making a "me too" product that will inspire no one.
So, why start a company now? Starting a new company is a lot more like deciding to fight a war than a battle. Keeping in mind that a typical start-up takes between six and ten years to reach an IPO or sale - the length of a real war - not the one to two years of the bubble based companies of 1999 and 2006. (Note the distance between those dates.)
As a gedanken experiment think about what the markets were like six to ten years ago, then try to project yourself back to that time and imagine that you could have predicted the mess we're in right now if you'd tried to from that vantage point. Intellectual integrity demands you admit you really couldn't. If, from the perspective of 2001, you really decided that the markets would be terrible and that when your new company was ready to get sold in 2008 there would be a terrible recession going on, you would have missed the amazing run-up in the markets from 2002 to 2007, during which time your little start up company would have probably been sold or achieved the nirvana of Cash Flow Break Even. Moreover, you would have missed having the basic economy drive your growth phase, allowing you to successfully deal with our current economic problems. Now, stand here, at the beginning of what appears to be a long deep recession and try to convince yourself that you can predict what general market conditions will be like eight years from now - you can't. One is forced to admit that except with some broad assumption about general cyclicality, we can not predict future economic performance. We certainly can't predict the value of our little start up based on some notion of what will be "hot" in the general market or the IPO market six to ten years hence.
Given we can't predict future markets at the time of starting a company and we can't really predict when the Great Idea will come to us, the only thing we can do is pick the time we'll start. For all the reasons above, recessions are a great time to start. If you have a great idea, start now. But, keep clearly and continuously in mind that a start up that is based upon the premise that it will be sold or flipped for a high multiple quickly will probably fail.
That behavior on the part of buyers vanishes during a recession. Instead, a start up company must be tightly focused on finding a real problem that customers will pay for - even during a recession - and achieving positive cash flow from those operations. Once the economy turns around, it will get easier and easier to be successful. However, companies without this focus and without the loyalty of customers who are deeply dependent upon what the start up provides to them, will most likely fail regardless of the economic times.
