Ask YC: What do you do if American economy enters a downturn? | Hacker News Reader

Ask YC: What do you do if American economy enters a downturn?

11 pointsriobard17 comments

An economic downturn seems to be very soon. What do you do then? Will there be many startups break down?

Even with economic downturns, there are still some fundamental truths that will prevail, and industries that grow during recessions. Use these trends to your advantage. For instance, businesses always want convenient ways to make more revenue/profit and cut costs. And curiously, Hollywood also tends to grow during recessions: http://www.phillyburbs.com/pb-dyn/news/80-03102008-1501254.h...

Most startups break down no matter what the climate. An economic downturn may be a contributing factor, but not the main culprit.

How many times must this question be posted here before people learn?

There are a few factors at play that keep me optimistic.

First, the web continues to attract double-digit increases in advertising dollars. While this growth might slow, it seems unlikely to reverse. This means the web industry will continue to expand even if the economy as a whole does not.

Second, when the economy slows people tend to save and invest instead of spending. Given that many startups are driven by angel investment or venture funds, that's a good thing.

Third, web based and open source technologies are making huge gains in big business. They'll be increasingly attractive as companies tighten their belts. Given that the YC crowd is focused on this sort of development, that puts us in an enviable position.

I would start to worry if Google, Yahoo, Microsoft's web division, IAC, etc start making big layoffs. They could flood the market with competent programmers, driving down market rates and increasing competition for investment dollars. (Although I'm sure there are some companies fighting for talent that would love for that to happen.)

I think there's a greater risk of VCs moving to greener pastures - solar, biotech, etc - as web applications become commoditized.

>First, the [...]

It has reversed before, why does it seem unlikely now?

Because it's a different market than it was in 2002. Technology has progressed and people continue to move from other forms of media to the internet. The large players are more stable. Media buyers are more comfortable with the idea of advertising on the web. That's why online ad revenue increased by 25% in 2007 - http://www.iab.net/insights_research/1357

In a downturn:

1. advertising dries up completely. 2. people tend to curb risky financial moves, such as early stage capital 3. businesses will cut back on almost all new development

The big question isn't, "Will it get bad?" but "Just how bad will it get?"

Look at this graph of television ad spending over the last 30 years - http://www.nextcenturymedia.com/images/Image3.gif - (the associated article - http://www.nextcenturymedia.com/library/dougross-article-b.h... - is less pertinent.) While there is a noticeable lack of growth during recessions, it's anything but dried up completely.

Jeff Bussgang does a nice job of explaining why VC funds are more attractive to investors during a downturn - http://bostonvcblog.typepad.com/vc/2008/01/whos-afraid-of.ht...

The sky is not falling.

Geographic arbitrage (i.e., use my open airplane ticket to Europe). Web 2.0 companies have an advantage no business has had in the past - instant mobility.

Remember that shifts are cyclical, temporary, and not the end of the world. Be happy for other countries which are finally getting a break.

Unfortunately, when the US economy has a downturn, the world economy follows. See the Nikkei's dip following a larger dip in the US last week. Obviously, the EU is providing a much needed foil to the phenomenon, but it's still a fact of life. As the US economy goes, so goes the world.

Of course, optimism will spike when the new president takes office, and we'll see at least a short bubble early in 2009. Whether it will end up having a permanent impact on the economy is another matter...

Anyway, smart startups are better equipped to deal with downturns than larger companies, despite the common "retreat to quality" wisdom that a couple of articles have talked about recently. Fewer employees, the expectation to run unprofitably for a year or two built right in, and a much tighter fist holding the cash. Dumb startups would fail, regardless, and those businesses in between small startup and mid-sized business--the no mans land where many "successful" early stage startups fail--is probably even more dangerous during a downturn. So, be thankful you're a smart early stage startup! (And, if you're in no man's land with a million or ten in revenues and no clue how to scale to the next level and steadily increasing expenses, best of luck to you. You'll want to hang on tightly, keep your hands and feet in the car at all times, and hope the rails carry you out the other side safely.)

Focus on creating value for your customers. Startups are inherently risky, but more mistakes are made when times are good than otherwise because teams are more careless. A downturn is a great time to start a software company that provides value to its customers.

I believe Bram Cohen said something along the lines of "Programmers don't take vacations any more. They just wait until their current company implodes, and then take a little time off before finding a new one."

if you are young, and single and with a normal job:

1. Make sure you are in good terms with your parents, or sister/brother, so if you loose your job, you can live in their basement for a while.

2. If you loose your job, now it is the best time to work on that idea... for reals. Necessity is the mother of all inventions.

Probably. But others will spring up in their place, and will have less of a frothy environment to grow in.

You work smarter, and cut out the fat of what you do. Then you abolish the Federal Reserve.

lay off two members of my personal mariachi band

same thing I do when the economy enters a boom period.

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