A financial nuclear winter may be upon us, but many startups will still survive and even thrive in this environment. Y Combinator’s Paul Graham argues that, in fact, now may be the best time to launch a startup. In an essay titled “Why to Start a Startup in a Bad Economy,” he notes that “what matters is who you are, not when you do it.”
The economy might be going down the tubes and investors are now gun-shy, but there will also be less competition. Investors and markets are fickle. Smart entrepreneurs need to adapt to the changing environment. And one of the best ways to do that is be able to survive on as little as possible. You need to become a cockroach. Graham’s advice:
Last year you had to be prepared to explain how your startup was viral. Next year you’ll have to explain how it’s recession-proof.
Fortunately the way to make a startup recession-proof is to do exactly what you should do anyway: run it as cheaply as possible. For years I’ve been telling founders that the surest route to success is to be the cockroaches of the corporate world. The immediate cause of death in a startup is always running out of money. The cheaper your company is to operate, the harder it is to kill. Fortunately it has gotten very cheap to run a startup, and a recession will if anything make it cheaper still.
. . . Another advantage of bad times is that there’s less competition. Technology trains leave the station at regular intervals. If everyone else is cowering in a corner, you may have a whole car to yourself.
Go forth, cockroaches and multiply.
(Photo by Mugley).
I agree that the fat start ups will have the hardest time in the next few months and the lean and mean ones will eventually rise to the top. We are emerging as one of those recession proof start ups and the looming recession will actually help us. We are based on the need for small business in America too look for all the economical ways to advertise themselves. We cant get any cheaper than Free!
This will be a fun and exciting year! Touche’
Please read this – Freemium is Not a Business Model (http://www.mark...business-model/)... and you will be a little bit less excited
The thing you forgot about is that freemium often has, or can have, an advertising component that offsets the marginal costs. Companies who adopt a freemium model are well aware that most people don’t need the features.
As long as Google keep trucking along, and companies continue to value web advertising, freemium isn’t going anywhere. If a company finds that their marginal costs are too high because not enough people are buying into the premium version of their service or application, they can simply cover those costs with advertising. You have to consider that for most of these applications their marginal costs are already near zero, and so they can use something as simple as a Google AdSense bar to offset that users costs; and in some cases, by an order of magnitude.
The problem with freemium will only come if/when companies no longer value web advertising (at least the way it’s traditionally done). In this case, companies will have to think about different mechanisms they can use to offset costs of non-premium users.
The first time in my life I love being called a cockroach!
Michael Kassing
MarkTend (just roaching around)
http://marktend.com
“Go forth, cockroaches and multiply” Might be a better species to call startup entrepreneurs than cockroaches.
How about dung beetles then? We can learn a few lessons from them!
http://in.youtu...h?v=0oQCyBAixEc
I’d be worried about Tony Montana!
lean and mean is the only way to build a business. There are going to be some great companies come out of this. It was during the darkest hours of the last nuclear winter that Google and Salesforce started to completely gain traction.
It was also the time Inktomi went bust and Sales.com was absorbed back into Siebel. All four companies were spending money, but the superior technology won out. These days a start-up needs to be lean and mean, but also be the best product in a market with high growth potential (i.e. something people want). We are helping by offering programs that include PR, blogger relations and new media marketing strategies starting at around a couple grand a month, sometimes less. We find the most efficient way to reach your audience and focus on that. No fluff.
History once again repeats itself; It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness…
Jesus, we get it – everybody and their dog is writing about the storm we’re about to face
lol I know. Like this is news. The world ended a couple weeks ago, lets move on. All this does is change the rules. You panic for 5 minutes. You breath, maybe watch some stupid TV show and then you get back to work, adapting to the new reality.
It not rocket science. We are people, we survive. It is what we do.
We saw this coming and instead of burning through high-rent valley VC and consultants, we moved our Dev team to Asia (US+UK developers at Asia prices)
Now we are ready to launch in the very very near future and couldn’t be on stronger footing as our burn rate is very low with minimal overhead and vested employee interests.
http://www.youbundle.com
Hmm. Yup. Your website looks like one of those spammy parked domains. Good luck with the cheap hires.
Well thats because it is a parked landing page – we have not yet opened our beta.
It likely is not the best idea to stand on a soap box and say look at me. I understand you are excited about your website but a lot of people who had jobs two weeks ago are faced with the harsh reality of not having a job this week. If you have a family to feed that is hard.
It is great you reduced your engineering cost but don’t brag about it. Remember who your market is. Be respectful of the problems of that market.
Well said.
I agree with him completely. The economic cycles may go up after a year or so, by the time we will have the clear winners of web2.0 round. Then after a year the web3.0 rush will begin, valley will buzz again with funding and hiring.. history is often comes with interesting patterns to observe.
“what matters is who you are, not when you do it.”
I couldn’t agree more.
Starving Entrepreneurs (wanted)
“what matters is who you are, not when you do it.” – I agree with the statement.
Certain people succeed, even when times are absolutely crap. Some never make it, even when times are good. What matter is who you are. What you have to offer and how effectively you do it.
thats true. Cut costs as much as you can and stay focused. We just reduced headcount by 50%.
Thomas from http://www.Spirofrog.de
I also thought that Cockroaches are one of the few species to survive a nuclear holocaust. But a Discovery Channel episode dispelled that myth – cockroaches are as radiation-proof as you and me!
HERE IS ANOTHER GOOD SURVIVAL INFO…
http://tinyurl.com/techsurvive
It’s funny that surviving on as little as possible is a more salient proposition than picking up the phone to generate $ales like it is life or death.
You can’t make it saving money. You have to generate revenues. If you cannot generate revenues, you will not make it no matter how much you save. So the key is to spend what you have to in order to generate revenues. If this means $100k over 3 months or $100k over 6 months, there is no difference. Your $100k in experimentation needs to produce cash.
1. Survival is not your objective. Making money is. Who cares how long you survive if you’re not making money.
2. Market is everything. In a bull market, morons can make money. In bear markets, even geniuses have a tough time. If you didn’t make money during the last few years, sit tight, get a job, and wait for things to thaw.
3. Starving is not a badge of honor. If you don’t have money, get some. Or save some. Or earn some. Starvation by itself does not mean that you will succeed. It is a thinking man’s game, not a marathon. You need to think properly. Even failed start-ups have hard working and hungry teams. It is by no means a good predictor of success.
By the way, the web used to be the easiest way to make big money fast. It’s over. Web 2.0 didn’t create a ton of new millionaires and only 1 billionaire (Zuckerberg). Almost no IPOs. Find another market or entire area of opportunity. The days of parlaying PHP skills into big cash are over.
Well said Winthrop… but, the days of making big money fast will never end. Hope to see you at the club for a game of squash. Capitol old chum.
“The days of parlaying PHP skills into big cash are over.”
So true, very true in deed.
But that depends on those with cash who want to keep hope/a bubble alive that may help in their already inflated valuation.
If there were no sacrificial lambs ($100 million to $1 billion acquisitions) would there be a market hype??????
Being a cockroach is only ideal for companies that want to remain in business after the hard times. All it is really is spend on expensive alcohol and high price pretty chics you call girlfriends or party goers
spend less that is on expensive alcohol and high price pretty chics you call girlfriends or party goers
@Jennings you’re right to pound sales, but Graham’s advice is really just this:
STFU about the economy and work on your startup. if you have an real idea, build it. if you’ve built something, get sales.
the bottom line is that if buyers are scarce because of a real or perceived recession, that’s outside your control. You do control costs, so manage them down.
if you’re rocking your sales numbers, then great… spend all you like. it’s not an excuse to not focus on sales. the name of the game is cash flow not market share.
those who run out of cash will be sitting a bar say, “yeah, I used to be in tech… tough racket…”
how many more posts of VCs or rich investors giving us the ‘cold winter ‘ speech.
seriously its not the end of the world, we all survived the dot com bubble and im sure other bubbles will follow,
Enough already of these VC’s and their end of the world speech.
Its like anything, some will thrive and others will die.
Can we please go back to the normal programming now of covering startups ? rather than every post been ( either nuclear winter, 1/3 layoff or Google/Yahoo ). I know these things are important but there are other things surely to write about.
His argument is a flawed apples to oranges comparison. There wasn’t a mature personal technology industry in the 1970s. There is now. It’s like comparing dogs and cats. This guy has zero credibility.
being a roach isn’t too bad eh? go startups!
http://gatesand...s.blogspot.com/
This is going to be a hard time. Nonetheless, startups with a business model that can help to cut consumer costs, like at Your TeleDoctor, have a much chance to survive in this environment.
Mehdi Akiki,
Founder Your TeleDoctor Inc.,
Most of the Web 2.0 startups are not “IPOable”. The two biggest ones – Myspace bought up by Fox and Youtube bought up by Google. You may survive like a cockcroach but no or few possibilities of exits. Just keep dreaming.
I love negative people.. yup talking about you Web 2.0 Bubble
I think it’s best to dream than become a corporate slave and ruin the globe, don’t you big guy??
This is nothing to do with being negative or positive. This is about being realistic and practical. This is a business model. You can keep fantasizing about startups that have no business model and no way of making money. Someday, it will turn into a nightmare.
me thinks the valley should think about making useful stuff again. being cheap is good. being useful is better.
Graham drives the short bus when it comes to start-up investment advice and Mike Arrington is his first pickup–headgear and all–on the way to bankruptcy school.
Paul: Stop talking.
Mike: How’s Seemsic? Dogster? Edgio?
Mike: You are the Isiah Thomas of Blogger/Investors. Congrats!
I disagree about “who” you are. The real question is “why” you are.
We are all going to die from blogatosis.
Great Advice…
Just started working for a startup e-tailer. Reassuring to know that there is still hope for us yet. ha
Great article. This is what I’ve been telling everyone for a while now. They tell me I’m crazy for starting a mortgage company when no-one can get a mortgage right now.
But if I can make it work during the lean time, then I can make it work good when the economy turns around.
Plus, you should see the costs of AdWords right now. Prices have tumbled as all my competitors have gone out of business.
- Charles
http://www.best...agedeals.co.uk/
Where’s CockroachLocator.com?
Perhaps will see start ups that actually make a profit on revenue versus on the sale of the company.
Hi.
And if you don’t want to be a cockroach, why not try being a dung beetle?
Check out http://in.youtu...h?v=0oQCyBAixEc
the economics downfall may very well cut off investments but is healthy for competition in a way that people would strive to run there business.
couldn’t agree more.
Times of recession is brings gr8 opportunities for entrepreneurs. Now, when the market is under a huge panic attack its easier to gain market share, cut expenses and hire the best staff