A downturn is a great time to start a business
“AirBnB, Uber and Venmo were created in a recession!”. Apparently over half of Fortune 500 companies were also founded in some kind of economic crisis.
People love to recite these facts, but it’s harder to find some solid reasoning for why a downturn presents a good startup opportunity. So let’s do that.
The downturn
While we’re not currently in a recession (all G7 nations are experiencing positive GDP growth), as an industry we’re obviously in a recessive period. The giants have been struggling since the start of the year: Meta is down 53%, Uber is down 49%, Netflix is down 64%. Recently minted public companies are faring the same, or even worse.
A key reason is that higher interest rates make investing in stocks generally less attractive. In short, the market is rewarding profitability more, which is hurting tech stock prices more than others.
These falling stock prices are leading to substantial job losses, and reduced VC investment as the returns for going public shrink. The rising interest rates further lures investment away from VC.
While these symptoms are bad for the industry right now, they do also present a great opportunity for new startups. There are three broad reasons for this opportunity:
1/ You’re born into the new rules
This new climate of “less investment, and more need for profitability” is a fundamental change of tech business rules. The market previously rewarded extremely high growth, and was happy to take risks on profitability. That has now shifted.
The shift is incredibly hard to manage for big, public companies. Maintaining performance, motivation, and culture while drastically shifting strategy and making layoffs is a task of damage limitation.
For established startups and scaleups it’s a challenge too - they’ve just found a formula that works, and then they need to shift everything. Strategies for fundraising, hiring, and execution all need to change.
Brand new companies have an advantage here. There is no business plan to change. There is no team to let go. They have a blank slate and can get cracking immediately, because their venture is designed with these new rules in mind.
If tennis changed rules to become a contact sport, the best players wouldn’t be the existing players that learned to fight. It would be the youngsters that grew up playing Fight Tennis™.
In addition to being more adaptable to change, early stage startups have less need to change. The exit timeline for new startups is c. 10 years, in which time the market may well be more favourable. This gives early stage startups some degree of insulation from the effects of a downturn.
2/ You can build a better team
Over the last 20 years, the price of starting a tech company has dropped dramatically, due to a rise in open-source and 3rd-party services that will do the heavy lifting for you (eAWS instead of own servers, etc.).
This led to more companies being created, which meant more demand for tech talent, and salaries increased. This made growing a team, especially a strong one, very expensive. Competing with FAANG for talent is an expensive hobby.
In a downturn, that changes. FAANG lay people off, freeze hiring, and otherwise encourage employees to leave. Established startups let swathes of their teams go. An outcome of the more competitive jobs market is lower salaries.
This is horrible for the employees involved. I’ve been through it myself, and it’s not a nice place to be. However, the fact remains that these changing market conditions are favourable for startups that are hiring.
Suddenly that great engineer costs a lot less, and they’re actively looking for employment. This is much more reasonable environment for early stage startups to grow their team. You can welcome these talented folks in, and give them an environment to thrive in.
There’s also a side-effect of employees realising that working for a big tech company isn’t as stable as they thought. This further pushes a subset of talent towards startups.
3/ Less competition overall
Peter Thiel talks about how competition is bad, and you should avoid it. I don’t always and entirely agree, but from a founder perspective competition does make things harder.
Low startup costs, and a glut of venture capital have made the last 20 years fertile for new businesses.
This meant more direct competition - as you start to prove out your business, competitors and copycats can get funding. Breaking out in this environment is hard.
There’s also indirect competition. As well as talent, customers were more expensive to acquire. The cost of performance marketing has skyrocketed. Even if you’re not competing to solve the same need, you’re competing for the same eyeballs.
In this downturn there is less funding, so there will be less competition. There will be fewer companies that weaponise capital and have unlimited war chests. Founders can focus on what they should be great at - building am exceptional product for their customers.
Additionally, incumbents are focussing on their core businesses. Their market caps have fallen up, and they’re much less distracted by some edge threat. This gives startups more time and space to grow.
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Recessions and downturns change behaviours for both businesses and consumers. Change is always an opportunity for growth for whomever can take advantage of it, and new, nimble startups will always be best placed to do that.
Combine that with cheaper talent, and less competition, and you’ve got the recipe for a very exciting environment to launch a business.
The game is now on ‘hard’ mode for everyone, but if you’re a founder obsessed with solving a customer problem, and willing to pour yourself into something people love, this is a great time to start a business.