More Reasons Why Now Is The Time For Hatching Something New

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More Reasons Why Now Is The Time For Hatching Something New

 

The following is a guest article by Neil Davidson.  Neil Davidson is co-founder and joint CEO of Red Gate Software. He also runs the annual Business of Software Conference with Joel Spolsky. His blog is at http://blog.businessofsoftware.org and you can follow him on Twitter at http://twitter.com/neildavidson.

A couple of weeks ago, Jason Cohen of Smart Bear wrote a guest post on 6 reasons why this economy is good for startups. Damn you Jason, both for your perfect timing and for writing the blog post I wish I had written. So I'm going to have to ride on your coat tails, scrape the barrel and come up with 6 more reasons why now is as good time as any for startups.

Here they are:

1) VC money is hard to get. Yes, this is a good thing. You only need VC money for a software startup in certain, very narrow circumstances: if this isn't your first startup, and if having the money would genuinely accelerate your growth (if you're Dharmesh, for example).  It takes time to get to used to running a software company. Mulla Rasrudin once said that good judgment comes from experience, and experience comes from bad judgment. Lots of money and bad judgment don't mix well. If you've not done this before then you will make many mistakes. Make small ones, not million-dollar ones, and make them without VCs breathing down your neck.

2) Even if you are unlucky enough to get VC funding, the odds are still good. In the late 1990s, in the days of Webvan, pets.com and Boo.com, the five year survival rate of VC-backed software companies was still close to 50%.

3) You need constraints to build great software. If there's one thing we've got plenty of in this economy, it's constraints. Make good use of them.

4) Constraints enforce discipline. You'll need to, among other things, manage your expenditure, focus on making products that people actually want to buy, learn the difference between cash flow and profitability and figure out how to market on a shoe-string. Now is an excellent time to forge those skills. You will need them the next time things go bad.

5) Times are turbulent, but the turbulence contains many pockets of opportunity. Big companies will be too large, or too clumsy or too slow to fill these pockets, but you, as a startup, can. And you only need the tiniest market niche to start up. Once you've started, you'll gather momentum, and you'll figure things out. Don't overanalyze: odds are you'll find success doing something other than what you intended anyway, so whether you pick a small market niche or a billion dollar opportunity doesn't matter. You'll end up doing neither.

6) In difficult times, skill and hard work, which you can control, become more important than luck, which you can't. I like this soccer analogy. If you want to compare my soccer skills with David Beckham's then don't put us both six feet away from an open goal and ask us to kick a ball into the net. I might get lucky, and he might show off and miss. Instead, start us off from the other end of pitch against a couple of defenders and a goalkeeper. Then you'll get a true picture.

Starting a business is risky, but not as risky as you think. The oft-stated fact that 90% of startups fail within their first year is an urban myth. In reality, the four year survival rate for IT startups is over 50%, and there's no evidence that this is significantly lower for companies founded in a downturn. And most start-ups that fail don’t crash and burn, owing people money and bankrupting their founders. They are quietly wound down, or sold on, and the founders set something else up or return to employment, with the added skills that even attempting, and failing, to build a business bring.

Starting up isn’t for everybody, but don't use the state of the economy as an excuse for inaction. Research shows that external factors such as the economy, or the industry you're in, aren't the only – or possibly even the main – factors that determine success. How much you love your product, and how deeply you're prepared to commit, count just as much. So choose something you are zealous about, think things through, save up some cash and quit your day job.

Posted by Dharmesh Shah on Mon, Dec 29, 2008

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)

posted on Monday, December 29, 2008 at 10:38 AM by Dan Marshall


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.

posted on Monday, December 29, 2008 at 10:43 AM by Michael


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.

posted on Monday, December 29, 2008 at 10:44 AM by Dharmesh Shah


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

posted on Monday, December 29, 2008 at 1:24 PM by Jeremy


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.

posted on Monday, December 29, 2008 at 1:35 PM by Dipankar Sarkar


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/

posted on Monday, December 29, 2008 at 2:57 PM by Nick Barker


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...

posted on Monday, December 29, 2008 at 3:11 PM by Reader


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. 
 

posted on Monday, December 29, 2008 at 4:14 PM by nick barker


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.

posted on Monday, December 29, 2008 at 7:39 PM by Jesse Smith


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.

posted on Tuesday, December 30, 2008 at 12:59 AM by Easton Ellsworth, TechStartups.com


Good article Dharmesh. Have a great new year!

posted on Tuesday, December 30, 2008 at 8:06 AM by John Stack


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.

posted on Tuesday, December 30, 2008 at 8:50 AM by Murty BVNS


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.

posted on Tuesday, December 30, 2008 at 8:51 AM by Murty BVNS


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.

posted on Tuesday, December 30, 2008 at 11:33 AM by Reader


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.

posted on Tuesday, December 30, 2008 at 11:48 AM by Michael


http://paulgraham.com/badeconomy.html

posted on Tuesday, December 30, 2008 at 2:53 PM by anonymous


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. 

posted on Tuesday, December 30, 2008 at 5:03 PM by Neil Davidson


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.

posted on Friday, January 02, 2009 at 6:46 AM by Schetikos


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!

posted on Sunday, January 04, 2009 at 3:13 PM by Andrew


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 
 
 
 

posted on Monday, January 05, 2009 at 9:26 AM by mandy


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

posted on Monday, January 05, 2009 at 12:37 PM by Chris


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.

posted on Tuesday, January 06, 2009 at 1:33 PM by Ayushman Dash


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 
 

posted on Tuesday, January 06, 2009 at 6:32 PM by Josh


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!

posted on Friday, January 09, 2009 at 6:18 PM by Ken Kaufman


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.

posted on Tuesday, January 20, 2009 at 2:49 PM by Jared O'Toole


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 
 

posted on Wednesday, January 21, 2009 at 12:25 AM by 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).

posted on Sunday, January 25, 2009 at 1:16 AM by Hendro


Hi ,  
 
Trust you are doing fine. I came across your blog and it is very interesting. I wanted to send some information about JobeeHive.com, which has become a valuable tool for today's professionals. 
 
Here is a brief note: 
JobeeHive.com is a unique platform focused around employer and salary research. Today, it is one of the biggest employer review sites in the world. 
 
JobeeHive.com enables users to rate/review companies (they have worked for), research on salaries or a prospective employer as well as get more info about a company - be it job offers, announcements, business opportunities, etc. The site provides rare salary information that helps professionals understand salaries, benefits and pay hikes in different companies across job grades and locations. And in the backdrop, JobeeHive is a platform to build a career network and interact with diverse industry professionals to tap their knowledge/ contacts. 
The site is now launching the JobeeHive.com Employees' Choice Awards, where employees themselves will choose the best employers in India across industry sectors. It is the first of its kind in India and the model will be taken across the globe in the coming months.  
 
JobeeHive is based out of Bangalore and was founded by Vishwas Mudagal and Sandeep Gudibanda. JobeeHive.com BETA version was launched in September 2008. Since its BETA launch, traffic has grown by 1900% and according to Alexa Rankings, it is a top player in its niche employer review segment in India and has 2000+ employers that have been reviewed on Jobeehive.com 
********** 
 
Please let me know if you need any more details.  
 
 
 
Thanks and Regards, 
 
Sneh 
 

posted on Tuesday, January 27, 2009 at 11:47 AM by 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.

posted on Saturday, January 31, 2009 at 8:21 PM by Mike


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

posted on Sunday, February 01, 2009 at 11:14 AM by 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.

posted on Sunday, February 08, 2009 at 2:15 PM by Dave Broadwin


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