Why to Start a Startup in a Bad Economy (2008) | Hacker News Reader

Why to Start a Startup in a Bad Economy (2008)

paulgraham.com

196 pointsrazin60 comments

For those new to a tough economy, here's my story from 2008:

I was laid off from the digital agency I worked at. I had been trying to find a new job for a while but no one was hiring at the income I needed to pay the mortgage on the house I just bought.

So, I started my own digital agency. I tried to think of ways to make their model better/faster/cheaper. Better: I would routinely measure the impact of my work. Faster: I would do it myself, no teams slowing things down. Cheaper: I'd charge half of what my old company was charging.

The business grew considerably despite the economic tough times. Everyone was looking for great work at cheap rates and I was willing to work long hours (8am - 3am for a few months to get off the ground).

As the economy improved I hired a team, raised my rates and worked reasonable hours again. After 5 years it was a successful enough venture that I was able to sell the business.

It's possible to make a great living in a bad economy, but you need some luck, some skill and a lot of hard work in my experience.

I would add a domain that is needed in bad economic times. Even better, one you can provide value other can't. then you are rather safe, I think.

This is easy to say when you have capital or access to capital. Having lived most of my life quite poor, I find it somewhat frustrating to hear things like this. When you can't afford food, rent, health insurance, etc, the last thing you're thinking about is dumping your life savings into a new business that has a 90% chance of failure.

Heh...yeah right there with ya bud. I've learned to just kinda internalize it. But on a bad day that can be difficult. Like when you hear someone saying how you just need to take a chance and mention something like dipping into savings or the possibility of living off your spouses income for awhile and it's simply not possible. And the sting of some of the responses you get...they're not wrong. They're 100% right. But still, it sorta feels like you've walked into a nice restaurant off the street and are shocked at the prices. And you notice others giving you a disappointing look and hear someone mumbling "Why are they even here if they can't afford it."

For some of us just getting to the point where you're able to take a chance is a goal. And if we're lucky enough to achieve that, it's not the lack of backbone that keeps them from taking that chance. It's that the equation for them is different. Failing for these people isn't falling on their face but falling on their face from 3 floors up. There's much more to lose and we're intimately familiar with what it's like at the bottom. It's more than living comfortably but the sense of pride in being able to support yourself and loved ones that you simply can not risk. Not being able to do those things truly makes you feel worthless and if you achieve that and have half a brain you wouldn't want to risk it in a million years.

The post was written for people who are interested in starting a company. If you're not in the financial state to be able to do so, then blogs about starting companies are probably not for you.

HN has a disproportionate amount of people trying to snipe "survivorship bias!" whenever someone does start a company, is successful, and wants to share what worked for them (much like what pg is doing in this post).

Why are these people here, I will never know.

It is possible for someone to simultaneously be interested in starting up a company and also recognize / call out logical fallacies.

"Eat yogurt for breakfast and you will be a successful lawyer" is survivorship bias, which I think is fine to call out an ignore.

"Reach out to all of your rich friends and family" is privilege, which I think is also fine to call out but shouldn't completely be ignored. Your individual "privilege" might be from participating in a veteran's group or knowing someone with special needs. Something that puts you in a unique position to address a problem better than others have. Having money is one of the most generic forms of privilege, so offering insight to when and how to best use it is useful.

I’ll have a choice soon to invest part of my savings into very cheap stocks or to fund my startup with life savings. I don’t think, I’ll do latter. On the other hand keeping startup costs low is universally good advice.

If you can afford to do it, it is indeed a great time to start a company.

Yeah, I see this myself right now. My small, little irrelevant startup wouldn't exist if I didn't have the money to try it for a year or so. Obviously, it helps that I never stand the risk of loosing health care coverage, unemployment benefits and social security in doing so. Which is one incredibly important aspect, it reduces the risk considerably.

The Airbnb founders both maxed out their credit cards, and famously kept the lights on by selling cereal at the 2008 Republican and Democratic conventions. I believe the actual idea for Airbnb spun out of them realizing it could help them pay their rent.

> and famously kept the lights on by selling cereal at the 2008 Republican and Democratic conventions.

Sounds like a great exaggerated story.

> I believe the actual idea for Airbnb spun out of them realizing it could help them pay their rent.

That may be, but the founders come from well to do families and I'm sure never worried about missing rent, getting evicted and being homeless.

There might be rags to riches stories out there. AirBnB ain't it. It's a riches to extreme riches story.

Almost certainly a lie. What would techcrunch write about, if the founders said something banal?

Revisionist, sexy origin stories are a proven way of getting free press. Somewhere, these guys are actually confessing how much free press their wild concoction earned them

There is one word missing from this post that contains a whole lot of the argument on the environment side: chaos.

Those who learn to thrive in chaos are most dangerous out there, for they have this contrarian impulse to rise when there's blood in the streets. If you recall a history lesson or two, that's how the most egregious powers are made —in wealth or might or legacy.

Right now, some of us are down —the situation is draining, energy-wise— whereas others feel invigorated, a drive to take action, make a move.

How we respond to chaos thus creates a big divide among us in times of major perturbation. There's this shift of potentials in the system, and kinetics go crazy, and some flee/freeze (seek security, refuge, maintaining the status quo, conservatively preserve what's left, etc) while others feel compelled to fight (to defend, protect, help; but also attack, kick in the disruptive nuts, solve problem, seek victory). For those, it could be the perfect storm to attempt a moonshot — I find there's a really unusual proportion of such stories among famous successful figures in virtually all fields, but I wonder if it's not survivorship bias + myth building + my own filters.

When in doubt it's almost always cognitive biases at play.

I think a more reasonable assessment would indicate that people who are well resourced (either through financial, social, or skill capital) are more likely to feel invigorated and therefore will build on the resources they already have by taking advantage of the chaos.

I am stoked.

If you want try start a startup in a bad economy come to my country, Argentina, and you will have de full package. Sometimes I read comments or blog post about the risks or the "bad economy situation" in first-world countries and a little smile on my face appears. If you really want to test yourself come here.

I think the title should be “start a startup in bad economy that will recover soon”. Ongoing misery is a totally different beast.

if you think that's bad. go to my home country, Zimbabwe.

If you think that's bad, go to Aleppo Syria

https://en.wikipedia.org/wiki/Four_Yorkshiremen_sketch

Argentina is like the climate Mecca of the Americas imo, too bad the government f'd up real bad essentially ruining the economy. I'd love to visit just because it still seems like a great place, just nobody has money. They just have assets.

and every time Argentina seems to be coming out of the tough times, the government comes up with a new hairbrained scheme to trash the whole thing.

But I have to say, I absolutely love the vibe in your country. One of my favorite places.

>What if you quit your job to start a startup that fails, and you can't find another? That could be a problem if you work in sales or marketing. In those fields it can take months to find a new job in a bad economy. But hackers seem to be more liquid. Good hackers can always get some kind of job. It might not be your dream job, but you're not going to starve.

Probably true but I think I would prefer the safe bet over the risky one. Why would I pass up on a 100% chance to make 100k when someone is offering a 0.01% chance to make a few million?

If the job was remote, maybe my mind would change. But VCs are asking us to cram into cities with $4000 rent for reasons they can't explain.

And most startup interviews these days are theater.

"Why would I pass up on a 100% chance to make 100k when someone is offering a 0.01% chance to make a few million?"

You don't have to start a startup. And if this is your attitude towards risk, you probably shouldn't.

If money is the only motivation, maybe you shouldn't neither.

I’d definitely take 100% * $100k = $100k over 0.01% * $10M = $1000, especially since money has diminishing returns to happiness. Now perhaps you think your odds are better than 1/10000 or that you’d make 10 billion instead of 10 million, but assuming the given odds and valuation, there’s no way I’m going with the risky offer.

To first order, successful startup founders are the people who don't do these calculations. Any early stage software business has countless plausible reasons why it's likely to fail; if you're thinking about risk-benefit analysis beyond the basic sanity check of "will my life be ruined if this doesn't work", you're sapping energy you need to actually make it successful.

(I'm not saying this to look down on you! I'm absolutely the kind of person who does these calculations, and thus shouldn't found a startup, even if it sometimes sounds cool to me.)

I think founders do those same calculations, Since you can't be successful if you can't accurately judge risk, but I think the utility function is different in how founders value non-monetary rewards and the mission of the company etc, and I think founders might also see themselves as in positions to influence those payoff numbers to increase the probability of success or the venture or the payoff as t the end.

Well said.

> for reasons they can't explain

Well I think they know why (vc funding, concentration of talent, etc), they just can't explain why you as an individual would want that.

The title's "Start a Startup", not "Join a Startup"!

Good point, that sounds way less risky.

I'm not saying it's not risky. It just sounds like the OP misread it about applying for jobs at startups. I'm not going to guess where the better risk/reward lies.

As someone else said to another poster if your risk tolerance is low you probably shouldn't start a company anyway.

>And most startup interviews these days are theater.

They have been for years. I remember meeting a few wannabe VC types a few years ago to get advice on bureaucratic procedures to start a business and all of them subjected me to cross-examination using the standard VC question-bank, when all I wanted was the ABCs of starting a business.

I think how true this is depends on how you're starting your business (specifically, how you're funding the startup).

I've personally had greater success with starting business when the economy is down than when it is up. As near as I can tell, it's because the field tends not to be as crowded. It's easier to get attention to your business when there are fewer startups competing for attention.

Since I've always avoided using investment money or loans to fund ventures anyway, a down market doesn't impact me as much as it does with many other approaches.

Ok, no. This is a bad meme. Read the comments here and you can see why.

You know what startups came out of the 2008/2009 recession? A car sharing company. A rooms-for-lease company. Many, many different delivery companies and a sh*t-ton of gig economy jobs.

Do you know what they all have in common? Taking advantage of people's weak economic situation. That's the sort of company that comes out of bad economies. The ones that take advantage of people being in poor economic situations.

But starting something that matters? You have to do it when customers can actually buy your products. And that takes a GOOD economy.

I can't wait to see the slew of low-quality companies that come out of this next upcoming, inevitable recession

> Do you know what they all have in common? Taking advantage of people's weak economic situation.

I don't agree with this characterization. If anything, these companies provided a way to extract value from under-utilized assets. For example, most people in the US have a car anyway. It's required. It's not a luxury. Taking Uber as the example, to work as a taxi driver previously required you to do strict shifts in a car that very much looks like a cab (that you may not own anyway). While many Uber drivers do it full time, some don't and some started off part-time because that was an option.

I'm more critical of AirBnB as I think the communities around AirBnBs suffer the externalities as people essentially run unregulated hotels. I'm not a fan of that at all.

> Taking advantage of people's weak economic situation

Wouldn't it just be simple supply/demand? What about all those jobs the gig workers have access to, which otherwise wouldn't exist?

There's a difference between a job and work. There's been many studies about chronic underemployment and lack of benefit by gig economy workers which are in effect working at rates drastically lower than what would be expected if it was actual full time employment as a job.

Starting something that matters? No better test of that than a bad economy...

How would you propose testing that if the market can't actually buy or validate the need for your product? The best test is a ready customer base.

Otherwise, it's just venture capital floating a lot of half-digested ideas and seeing which sh*t doesn't sink.

I'm pretty sure he meant that if you have a ready customer base in a bad economy, you're providing something of real value because people reduce spending on luxuries.

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. So the cheaper your company is to operate, the harder it is to kill. And fortunately it has gotten very cheap to run a startup. A recession will if anything make it cheaper still.
If nuclear winter really is here, it may be safer to be a cockroach even than to keep your job. Customers may drop off individually if they can no longer afford you, but you're not going to lose them all at once; markets don't "reduce headcount."
What if you quit your job to start a startup that fails, and you can't find another? That could be a problem if you work in sales or marketing. In those fields it can take months to find a new job in a bad economy. But hackers seem to be more liquid. Good hackers can always get some kind of job. It might not be your dream job, but you're not going to starve.
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.

You're an investor too. As a founder, you're buying stock with work: the reason Larry and Sergey are so rich is not so much that they've done work worth tens of billions of dollars, but that they were the first investors in Google. And like any investor you should buy when times are bad.

One of PGs most influential essays, at least for me. If anything, the emergence of cloud services made start-ups even cheaper since 2008.

I get what he's saying, but the majority of the richest people in history were born ~20 years before the early American Industrial/Steel boom or ~20 years before the internet was popularized. Macro is important from a population level perspective.

Can I pay my rent in startup ideas?

You would have to pay rent with or without a bad economy if you're starting a start-up.

Someone leaving a stable job to start a start-up would've already factored in rent payments.

Does a bad economy lead to higher rent?

Ideas are worthless.

Ideas are both a dime a dozen and invaluable. That is, ideas are easy to come up with by the bushel, but you can't have a business without one.

Unimplemented ideas are worthless, though.

I’m working on ideas for a new startup and this is a very different economy than three weeks ago. The Dow is down 24% in that time. Overall, I think my chances are better.

Raising that friends and family round might be tougher, since some people are feeling less rich than they did. Others will be looking for a hedge.

I’m targeting B2B SaaS, and there’s certainly going to be some purse string tightening. But I imagine there will still be room for low-cost tools with a 10x ROÍ, which is the surest way to be successful, anyway.

The biggest advantage I have going is flexibility. Right now I can turn on a dime, which a public company, or even a Series B, can’t really do.

A timely reminder (was that really only 12 years ago?).

But (maybe a big but), recessions are not all created equal. Seems the unknowns are a lot different this time around.

Brilliant post that inspired me to do this research when I was at ReadWrite:

https://readwrite.com/2009/04/30/what-do-vcs-say-and-do-in-e...

Exactly what I needed - thanks PG. Didn't really know what to make of the current situation.

Another gem that always gets me going: http://www.paulgraham.com/vb.html

Sweat equity increases in value as the amount of money being invested in startups diminishes

If you don’t want to start a startup, just invest in one.

One that is derisked and not yet IPO.

But usually only accredited investors can do that. Another way that the Federal government helps the rich get richer.

PS: The JOBS act changed that with Rule 506b but you have to convince startups to use it

> If you don’t want to start a startup, just invest in one.

In a recession, there may be a lot of people with talent, a lot of time, but little to no money. Investment is a game for the rich in the first place, which is why most people don't care about rules involving accredited investors.

So invent your own currency (use Ethereum or intercoin.org) and pay w that.

Slicing Pie is a good book for this

But not everyone will agree to work for it, for others you will need cold hard cash. And stock investors are all around, I am talking to them, they want to take $ out of the stock market and put it in SOMETHING.

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