COMMENTS
Two quick questions: why the emphasis on software startups? Are the rules different relative to hardware startups? (I have a three year old hardware startup company)
Great article Dharmesh! If we look historically many of the great companies were founded in downturns, both historically and more recently. Google, Digg, Flickr ... all got their legs during the dot-com 1.0 bust. Disney and a bunch of banks that existed, but were tiny, got their legs during the Great Depression. It's almost easier to get movement during downturns because it a) lowers competition, especially competition funded by dumb money, b) lowers labor and advertising costs, and c) helps people focus.
Dan:
1. Emphasis is on software startups because that's what I know.
2. I'm guessing that there are a lot of common challenges across different types of startups (including hardware), but software startups are distinctive because the capital costs are so low.
Very good article. I think that the software business is very unique. It can have a low cost of entry and you can bootstrap it with consulting work. The downside is that the barrier is low for your competitors as well.
Thanks for the article.
Jeremy
http://refocusing.wordpress.com
I do feel that most of these learnings are not related to the recession. They should be general rule of thumbs for any business. What this current scenario provides is an environment of resource constraints which can be simulated in developing nations without recession :D.
Another great post! Some good additional points on VC's. Not so sure on the failure rate stats though. Seem a little low. Loved the last post (6 reasons why this economy is good for startups).
I to think it is a great time to have a startup. Adding to Michael's comment Microsoft and Apple also started in a downturn. I believe the downturn brings great change and opportunities. Although it does mean the founders have to full commit in a time of uncertainty. I posted today about the career options founders of very early stage startups have during a recession - http://nickpoint.co.uk/2008/12/18/5-career-alternatives-for-start-up-founders-during-the-recession/
I think this analysis is a little naive. If the macro economy continues to go to hell, there is no demand for whatever you are selling regardless of whether it is software or hardware. Factoids like 'Microsoft and Apple started in a downturn' mean nothing, because this downturn is far worse than anything we've seen since 1930, and certainly has no comparison to 1975.
Looking at the five year survival rate of VC/IPO funded dot bombs is also hardly an accurate data point. First, since they were sitting on cash and had some revenue it took time for them to crater. But once the economic storm hit they were gone in months, not years. And second, if your best argument is to do no better than pets.com or Webvan...
I agree this is an unprecedented situation which is likely to get worse before it gets better. However like I say in my post 'Business is still being done out there, it’s just the focus of needs is changing.' and ' if you have got the right product at the right time with the right prospect they will say yes' as Apple, Microsoft, etc had.
It is a personal decision founders have to make as I wrote about. I believe founders have the options to bail-out and go back to work; bail-out and go on a very long holiday; bail-out and give up or adapt their plan, if necessary, and stick with it. I would welcome your comments. In the end it depends on whether you are a half empty or half full glass type.
I think there is a lot of evidence that companies that started in a recession or slow period end up doing better (on average). Maybe because they are forced to quickly learn to be more efficient and productive. Maybe because they are forced to build things that people are willing to pay for, rather than having the luxury to essentially play at R&D during more flush times.
Neil (and Dharmesh), thanks for posting these great points.
My favorite: "Constraints enforce discipline." It reminds me of this: "Necessity is the mother of invention."
Lots of necessity going around right now ... it's certain to give birth to lots of inventions and innovations soon.
Good article Dharmesh. Have a great new year!
I agree completely with the post. In these troubled times smart and lean startups dealing niche products and services can easily get wonderful success rates. In fact we are planning expansion for our Project which we postponed for two years.
I agree completely with the post. In these troubled times smart and lean startups dealing niche products and services can easily get wonderful success rates. In fact we are planning expansion for our Project which we postponed for two years.
All I'm seeing here is a lot of opinions. If there are formal studies showing how startups founded during recessions do better than those founded during good times, please post a link to one or two. Otherwise it seems like feel good hand waving rather than analysis.
I'm not saying a startup cannot succeed in bad times, but in my opinion you'd be unwise to leave a well paying job to found a startup in this environment, unless you are independently wealthy.
FYI Google was founded in 1998 and raised $25m+ from VC's before the crash, so they hardly fit the example. Both Flickr and Digg were launched in 2004, when the recession had eased. Digg was also VC funded.
Flickr launched in Feb of '04, so was built in '03 -- you may not realize it but it takes us awhile to create websites; they don't pop out overnight. Keeping in mind things didn't hit the skids until the end of '01 -- a specific event in September, if I remember -- that time-frame was the valley of death for tech companies. Digg was also built during that time, when "dot-com's" were a joke. As for Google, they started in '98 but gained momentum during the bust; they actually had no ads -- and no revenue model -- in '98. The bust had them focus on profitability. If you're at a big company, enjoying a big paycheck, and not contributing substantially more than that to the mothership than you cost, I think some pre-emptive thought towards income diversification may be a good idea. If you don't agree, I have some Madoff shares to sell you.
http://paulgraham.com/badeconomy.html
Re "All I'm seeing here is opinions", I did try to get some hard facts. I talked to one academic and somebody at the SBA who specializes in this field.
Neither of them was aware of any study that had managed to track whether startups were more or less likely to fail in a recession.
Their opinion - and although it's an opinion, it's well informed since they study these things for a living - is that although the macro-economics would have some effect, it wouldn't be much, and would be dwarfed by other effects.
Great post. My summary of this is from a movie I saw with my kids a while back. "See a need, fill a need". From the character Big Weld in Robots, played by Mel Brooks. Unfortunately, we tend to see what we "think" is a need rater than a legitimate need that people will actually pay for. Big Weld is on to something.
There is always room for a great product at the right price, especially software. I did a post today on a couple cool apps. http://www.printingforless.com/blog/business/cool-software
The world is a slightly better place because someone dared to do the startups that created them. So if you think you have a great idea and the passion to execute on it, go fo it!
I enjoyed reading your 'coat-tails' article as it held what many of us are no longer feeling - a soupcon of optimism!!! I read another really enlightening article about the challenges facing ISV's in 2009 - I found it covered things I had recognised as forthcoming and immediate issues, and outlined some that I hadn't even considered, from the new IT cloud formation to the specific challenges of the credit crunch. http://www.computerworlduk.com/management/it-business/it-organisation/news/index.cfm?newsid=12399
mandy
https://partner.microsoft.com/UK/program/managemembership/empowerprogram
Microsoft Empower for ISV's
Venture Capital may be harder to come by and the risks may be higher now, given the economic crunch, but nothing touches the camaraderie and opportunity that can be gained from the start up experience not to mention the unique experiences in and of themselves http://www.culture11.com/article/36108?from=feature
I think the last sentence "So choose something you are zealous about, think things through, save up some cash and quit your day job." sums it up. I would like to add that it also depends on an individuals risk taking ability. Also the saving cash part is very important befor quitting a job.
Another good article in a series that I really appreciate. Just starting now myself, this makes me think maybe I'm doing the right thing...
You can find me here:
Fuller Systems
Thanks for clarifying that VC money can be a very painful process and that good old fachioned financial discipline is going to be the best way to build a successful company. Nice job!
Not getting funding combined with these tough economic times is a recipe for success. It will make you dig harder and squeeze every penny everywhere. This will make your business stronger in the end.
It may not be easy and even a little scary but there just isn't a better time to start a business.
I have been searching all over google for some sort of a step by step approach in incubating a new startup. I have found a lot of valuable advise on the functioning of statups but none on the practical sense of actually going about creating a company.
Can someone give pointers to:
a) What is the process of registering a company?
b) What's the cost involved in the process (Registration...etc)
c) Any way to get any specific tax benefits?
Thanks & Best Regards,
Anoop
Hi Anoop, i think your questions are best answered by expert (accountant or attorney) rather than random person from online forum since it can be differed from place to place (i'm from Australia) and the terms can be so complex.
However, what i learn from experience is that, all those legal matters are not the most important thing when you just first starting up. No one is going to sue you when you are that kind of tiny little company.
i think, proving that there is business for the idea is the most important (make the first sale?). After all, our target is to start a business. Not to start a company (entity).
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Thanks and Regards,
Sneh
Is it just me or does Sneh come across as desperate?
Hey Sneh, shamelessly promoting your company on a blog in a context where there is absolutely no relevance comes across as begging for traffic.
If you're that good and "one of the world's largest" then we should already know about your site and you would not need to spam blogs for traffic.
You're pathetic.
Hey Mike,
Hope you are doing good, by the way did you even look at the site? I am sure you did not. Please make sure not effect someone's goodwill before commenting publicly. Here when we are talking about startups the whats the bad in sharing our story? which is one of the successful startups.
Thanks Sneh
Very good posting. Further to your point about VC money, I have a number of clients who finally stopped looking for VC money and focused on their business. They still need some funds, which they are getting from friends, family, angels and etc. But, the moral to the story, which supports your comment is that their businesses are looking better and better. One even turned a small profit this year! When, and if, they go back to raise VC money, it will be on much better terms than they could have gotten to date.