Some of the biggest corporations in the world got started during terrible economic times. United Aircraft and Transport Corporation was formed in the year of the stock market crash of 1929. The company later spun out Boeing and United Airlines, and is known today as United Technologies. HP was founded in 1939, toward the end of the Great Depression. FedEx got started just before the 1973-75 oil crisis and Microsoft was founded toward the end of that very same recession. My own company, ThingMagic Inc. (admittedly much smaller than the aforementioned tech giants), was founded right in the middle of the dot-com bust and lived through two more major economic crises before we got sold in 2010.
Here are 5 reasons why founding a tech company during bad times is not such a bad idea:
1. Frugality is a startup’s most important virtue. Starting a company in bad times will teach you how to make due with less: you content yourself with a smaller salary, you hire fewer employees, and you travel only when absolutely necessary. Fiscal discipline helps you stay on track during the inevitable ups and downs in your company’s life cycle. It’s easy to ramp up spending when the economic environment looks better. It’s very hard to cut down on expenses, when everybody is used to lavish spending in the first place.
2. What doesn’t kill us makes us stronger. In daring times, customers are even more discerning with their spending than in a good economy. When every dollar counts, businesses and consumers focus their spending on the essentials. For your startup and product this can be a painful but valuable test: Is our offering truly needed and useful? If you pass the test and are able to sell product despite the bad economy, you have it made when the economy gets better. If you fail the test, perhaps you should rethink your business plan.
3. Venture Capital is difficult to find, in good times and bad. Raising venture capital is never easy, certainly not in bad economic times. However, the timing and availability of venture capital is not perfectly correlated with the rest of the economy. When a fund is raised, the VC partners need to invest it, whether or not the economy just took a downturn. On the flip side, when the economy improves, it can take years before the VC’s are able to raise money again from disgruntled investors. The dot com bubble started to implode in the spring of 2000, and yet more than $100B were invested that year, more than 3 times the average annual VC investments over the last 18 years.
4. How about residing in luxury office space for almost nothing. Office space is easy to come by after the economy. When big plans of expansion falter, corporations make sublet space available to very attractive conditions. Startups can negotiate terms that include many months of free rent and discounts on rent of more than 50%. You may even benefit from the spectacular décor and furniture your landlord acquired at a time when it took pool tables, wet bars, and fancy espresso machines to attract good employees. Which gets me to the next and most important point…
5. We don’t pay well but – unlike everybody else- we are actually hiring. Finding good employees to work for your startup is a lot easier when the Google’s and Facebook’s of the world are not snatching up talented people with extraordinary salaries and perks. The market for people, engineers in particular, is highly dependent on the economy. In good times, candidates get to pick from opportunities that provide job security, pay enormous salaries, and offer stock options. In bad times, such generous and comprehensive packages are hard to come by. Candidates may just decide to work for you because your startup offers great upside down the road.