OnStartups

Start Now: 6 Reasons Why This Economy Is Good For Startups

Posted by Dharmesh Shah on December 3, 2008 in strategy 59 Comments

The following is a guest article by Jason Cohen.  Jason is the CEO and founder of Smart Bear, Inc. Smart Bear creates tools for peer code review.  Jason "gets" software startups.

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Doom and gloom. Layoffs, bankruptcy, insolvency, bailouts. Blah blah blah Wall Street, blah blah blah Main Street.

It's a terrible time to start a company, right?  Wrong!

Here are six reasons why you should start your new company right now.

1.  Low opportunity cost

When the economy is booming, staying in a regular job makes sense. Generous bonuses are common when revenues are soaring, stock option grants are valuable when an IPO is imminent, your resume is improving in direct proportion to the success of the company.  Upside and safety! Fabulous.

Of course that scenario is almost non-existent today.  Most companies aren't hiring; many are laying off. Salaries are low, bonuses are suspended, stock options are as worthless as a vote for Pat Buchanan.

So if the alternative is working for low pay without job security, why not work for yourself and build your startup? You'll be investing your time and energy into something with more potential upside in future. If you're talented and have always toyed with the idea of a startup, financially it makes sense to do it now.

2.  Cheap Talent

It's hard to hire good people because they already have a job.  But right now that's not true -- companies are exploding and laying off everyone, even the stars.

If you're starting a company you're probably looking for a co-founder more than an employee. Even better. In an environment where few companies are hiring, lots of stars (or, better, potential stars) are out of work.

The market is flooded with good people.  Maybe you yourself just got laid off with some co-workers you like!  Just keep your hiring standards high and dig into your social network. (Or go get a social network now. See? That Facebook account really was a good idea.)

3.  Cheap Stuff

Need cheap office space? Layoffs mean newly empty desks in empty offices with phones that still work. Look for subleases where someone is trying to recoup some costs -- often they'll throw in Internet as long as you don't abuse it.

Need cheap furniture?  Companies are dumping stuff into used furniture stores and there aren't a lot of buyers.  Drive a hard bargain.

Need cheap advertising? Ad revenue is drying up as companies down-size marketing budgets and miss their next round of funding. Combine that with lower readership (especially in print) and ad deals are everywhere. Don't listen to the protestations of ad reps -- they're under duress and will take almost any offer. (I'll post later on ways to wrangle with ad reps.)

With everyone hurting, deals are everywhere.  Your expenses will never be lower than right now.  Low expenses mean getting to profitability faster -- exactly what a new bootstrapped company needs.

4.  Eager customers

When budgets are tight, people need to get stuff for free.  Good for open source projects, bad for companies, right?

Good for startups.  Remember, with your first twenty customers you'll be giving away your product for nothing.  You need to -- your product isn't fully-formed, they're helping you work out the kinks, you're counting on them for testamonials, and you need to prove your product works in the market.

You'll be a Godsend to companies who need your product.  Their (lack of) budget prevents them from buying anything else, including competing products that are better than yours. They'll be ecstatic to get something for free or cheap.

Here's a trick: Trade your product for a customer story (that you write and they approve). They'll be happy to tell the world how you bailed them out of their crisis.

I'd like a side of grated cheese, please?

5.  Competitor carnage

Is there an 800 lb gorilla blocking your market?  Or a few hip companies you're afraid to compete with?

They're all in SOS mode now. They have overhead, recurring bills, 12-month advertising contracts and 5-year office leases. Their prices are high and are hard to lower.

They're eating cash.  Those that are unfunded are watching cash reserves fall, computing months-remaining before they'll have to close the doors.  Venture-backed companies are in a bigger pickle -- they weren't profitable before, cash is now disappearing at an alarming rate, and many of them won't get fed again when they run out.

Perfect, if you're a little startup.  You have none of these pains; you're sipping cash with no overhead and lots of time to devote to coddling new customers.  While your competitors convulse, shed talent, and invent stories to calm their doubting shareholders, you've got nowhere to go but up. While they're figuring out how to wring more money from their existing customers, you're acquiring new customers they can no longer entice.

6.  "Now" is always the right time

The most common day for starting a new company is the same as starting a new diet: Tomorrow.

Take the leap.  Not tomorrow.  Today.

The third-hardest thing you'll do is to take the leap. (The second-hardest is getting through the first fifty sales, the ones well before the chasm, when you're sick of tech support and wondering when the real money is going to show up. The hardest is firing someone.)

Never mind all that. Get started. "Now" is always the right time to start, because otherwise odds are you'll never start.

If you don't start, you're doomed to a life of trudging through jobs, depending on someone else for salary and bonuses and health care and retirement, a life's work without ownership or upside.

You're better than that.  That's why you're reading this blog.

So go for it.

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So, what are your thoughts?  Are you convinced yet?  Still think that toiling away at that (ahem) "stable" job at that Fortune 500 company is the right thing to do?  I realize that taking the leap is hard, and situations vary, but it's good to at least think about it.  Lots of other people are thinking about it (or doing it) too.  The OnStartups group on LinkedIn now has 34,000+ members.  Of the 170,000+ groups on LinkedIn, it's in the top 10.  So, you're not alone.