But second, even if you were sure that a recession was coming, you shouldn't let it affect your plans for starting a startup. Yes, funding does tend to dry up somewhat when the economy is bad. But if you look at startups that succeed vs. those that fail, the quality of what they built has much more effect on the final outcome than the state of the economy when they were getting started.
So this is yet another case of founders worrying about the wrong things. Recessions don't kill startups. Making mediocre stuff kills startups.
Focus on customers and revenue and a value proposition that's compelling even when times are tough. Sooner or later your startup will face tough economic times, sooner is better.
Either way, keep it lean (in terms of investment and burn rate).
Also, there is a lot of talks of online advertising revenues going down, and this might even damage companies like Google a lot. But if you feel like you have a product that would attract many eye balls then you should implement it without worrying too much about online ads, and also you might be able to either find a business model for it that doesn't solely depend on ads or find other interesting exit options for yourself,.
In terms of venture capital, it all depends on how much money your project needs. As many of the "web 2.0" companies don't require much capital to start, I wouldn't think it will dry up, but if more and more of them fail to eventually generate revenue, I would assume the VCs will get more selective. But since the capital needed is much smaller than the dot-com era I would hardly think that vc's will dry up. Of course that is IMHO.
People will need somewhere to put their money. Some will turn to hedge funds and private equity. Others will turn to distressed debt funds, seeking to pick up the pieces of the recession. I'm sure plenty of people will turn to venture capital as well.
EDIT: That being said, I don't think it matters all that much whether or not we see a recession. Economic growth certainly isn't going to be great over the next year or so, but does it really matter if the GDP changes by +1% or -1%? All that's needed for a recession is two consecutive quarters of negative GDP growth. I think this is quite likely, but I doubt we will see real pain. Recent economic stats have been holding up despite the pressure from housing. Inflation remains moderate in the high 2% range. The Paulsen subprime rate freeze should help reduce foreclosures and slow house price depreciation. We'll see how it goes.
All a recession does is trim the excess baggage from the economy. Companies that aren't the most efficient, and from the startup world, the concepts that aren't the most profitable or capable have difficulty. The rest make a little less, but get by.
IMO it's the best time to start something, since you'll be thinking "worst case" right off the bat. This should help your decision making. You'll naturally want to risk less and will be more deliberate with the directions you follow. You'll have a stronger, more efficient organization than you would if you started during a boom time.
Then, as the economy brightens and you emerge, it'll be gravy train time!
So my advice to CarpeDiem is this: In a recession even more than at other times, don't depend on big deals you have to close in order to survive. Lots of small customers that value your product and pay real money is what you want in that situation (and probably in any situation). I wouldn't rely ad revenue either because it's notoriously volatile in recessions.
Ah yes, before I forget (although I'd rather like to forget that) we did actually have venture capital funding, but the VC went bankrupt before the second (already agreed) round of funding went through. And that VC was a subsidiary of a major corporation, an icon of stability, not reliant on the tech or telecoms sector, but it still went bust :-)
@nickb: That Morgan Stanley report is what prompted this post. I think it is prudent to question the source, however.
@shayan: My team and I have 6 months of savings, meaning we can pay the bills for 6 months before we either need income or investment. Do you think that is long enough?
@skmurphy: This makes a lot of sense to me, there are a few anecdotal stories about 2002-2003 being a great time to have started a company. And theres that report that ~50% of pre-1999 companies are still around. Good point.
After thinking about it some more I came to several comclusions: 1. I am very unhappy at my current job. I'm young intelligent (or so I think), hard working, and I have big dreams. I am capable of doing much more with my life than this job.
2. If my startup fails, I can blame it on the economy.
3. Maybe it is a bad time, and maybe it is a mistake to start a company right now. But its a bigger mistake, even a tradgedy to be afraid of the unknown. I won't let my life be run by fear.
I'll keep the YC crowd posted about our progress ;-)
But I would say in general you would spend about 6 months developing your product, and having something ready anywhere from a good working alpha version to something more of a working prototype and work in progress. I hardly doubt there are too many companies that can start generating revenues (let alone profits to spend on living expenses) within six months from the day they start.
So I would say the best way to do this is to start working on the idea before you quit your job, try to get a prototype or something together, and start looking for funding. I think in your case at the end of six months you will def need outside money (again since I doubt you'll be generating revenues by then and you are out of savings).
So regardless, if you do quit, I would recommend you looking for money right away. The worst thing to ever do is to ask for money when you need it, and when you are under pressure. Take your time, do your shopping, find out how interested people are in your product and try to raise some smart money before your time is up.
and please do keep us in the loop, and good luck to you
6 months seems to be cutting it pretty close - as a general rule, everything takes 2-3 times longer than you expect it will. Remember, there's a good chance your first launch will fail. We launched 2 sites in the 9 months where I kept my day job, and both went kerplop. That could be because of a half-hearted effort (the app I'm working on was also the main plan, I just couldn't concentrate enough to build it while I still had the day job), but in general easy sites don't make money, and sites that make money aren't easy.
Also as a reminder, the more you have achieved, and the more you have to show, not only the easier you can get funding, but the higher you will be evaluated, which is definitely to your benefit. I would say giving out shares and raising money just so you can pay for your life expenses is not the best idea, get a line of credit!
Anyways, it looks like you are in better shape than I thought. All the best to you.
I'm not @shayan, but I'll put in my 2cents: no. It's not enough. Given the current economic conditions and the realities of startups you should have more like 18 to 24 months worth of expenses saved up. Because: 1) you don't want to have to go hat in hand to VC at a very vulnerable time and 2) you don't want to have to go back to work in the middle of your development cycle because you ran out of money.
Yes, you may think it'll only take six months till you get some cashflow, but it'll likely take longer than that.
Now is as good a time as any to do a startup, but do make sure you're adequately capitalized.
I, for one, am buying a bike while the steel is still exchangeable for all that green paper I have lying around.
I remember reading somewhere on the Internet that one way to solve problems was to "redefine" them. [0] So try thinking "reasons you should start a startup". I can think of a few straight off.
- the coder pool is going to increase as businesses close or lay off extra staff.
- rents on property are going to be cheaper
- consumers are probably going to tighten the strings and shun payment to services of dubious value
- as opportunities, credit dries up, creators are really going to have to re-evaluate "what users want", now. Not pre-crash or recession.
- now you have to be frugal out of necessity :)
The advantage here is the rules of the game change. And change quickly. Where there is change there is opportunity as yesterdays "new ideas" become mainstream and relegated to the history of technology. Thats one theory. The other is in the hiatus the chance to build new technology and ideas has some breathing room to grow.
I'd also like you to consider the "future effect" of the current boom. A backlash is coming for those working in "safe, secure jobs" where market demand wane. I found this in the Australian press [1] and read as follows:
"... Michael Warrilow, Managing director of IT advisory company Hydrasight, believes today's tight labour market may be creating resentment among employers who have made pool-playing, T-Shirt wearing and all-day-Facebooking a part of the work 2.0 experience ..." [2]
and then continues ...
"... Generation Y will be appeased for as long as we continue with low unenployment... Once employers have more choice, there will be a backlash against their behaviour. " [3]
I can think of no better time to start a startup and it gives you a new reason to say to your folks, "At least it's not selling real-estate".
[0] Ideas for Startups: Wealth, 12 paras down ~ http://www.paulgraham.com/ideas.html
[1] A more conservative market to the US. But I have no doubt that VC's are also sharpening their knives.
[2], [3] Simon Sharwood ~ http://www.theage.com.au/news/technology/fast-forward-to-08/...
However, it's quite possible that this will be a rather deep recession - probably the deepest since the 1980 - 1982 recession. I was in college then. It was very difficult to find work of any kind.
The question on the table is should you leave your likely very safe government job to do this startup. I'll guess this is a software startup of some sort, and that your main expense is living expenses as you develop the code. That being the case, you should probably have at least 2 years worth of living expenses in the bank prior to doing this. A credit-crunch recession such as the one shaping up now means that it's going to be very difficult to borrow money. So do plan to self-fund as much as possible right now. Also, who are your target customers? Will they have trouble coming up with the money to pay you if we get a serious recession? - this is something you should think about.
If you don't have enough money on hand to be able to live for a couple of years, then I'd probably caution you to wait until you do have that much saved up. In the meantime, while you continue to work and save you'll have time to find out if this is just going to be a mild recession or something much more serious.
Carpe, are you sure you don't want to keep your govjob while working on the startup?
http://www.telegraph.co.uk/money/main.jhtml?view=DETAILS&...
I work on a trading floor at a major investment bank, and no one near me mentioned the Morgan Stanley report. My firm has been forecasting a 33% chance of a recession.
Interest rates are nowhere near where they were at the beginning of the housing expansion -- the Fed Funds target rate was at 1% in 2003; it's at 4.25% now. Most people are saying that even in a recession scenario, the Fed will only cut to around 3%. Fed Funds aside, other interest rates remain high. LIBOR (the primary rate at which banks lend to each other) is around 1% above Fed Funds, depending on the maturity. Interest rates on corporate bonds are creeping up as lenders demand to be compensated for increased default risks. Swap spreads have widened. Consumer rates on mortgages and student loans are still relatively high, now that the secondary market for consumer debt has shrunk. Only Treasury yields remain low as investors seek the extra protection they provide. So it's not like the Fed has massively cut rates and money is sloshing through the system.
Second, excessively high interest rates can harm individual consumers. At the individual level, it means that you pay a higher rate to get a mortgage, buy a car, pay down your student loan, or whatever. The bigger effect is indirect though: companies can't borrow money to expand their businesses. This means lower employment growth, lower capital expenditures, less R&D, etc. People get laid off, paychecks are cut, consumer spending goes down. By cutting rates, the Fed believes (rightly, in my opinion) that they can at least alleviate these effects, even if it's impossible to prevent them entirely.
Lower interest rates aren't even that beneficial to banks. Banks earn money by lending it out. If they are forced to lend money at lower rates, they simply aren't going to earn as much revenue from interest. Wall Street banks also make money through things like trading, merger advisory, debt & equity issuance, etc. -- stuff that isn't really dependent on the absolute level of rates. A Fed Funds cut is hardly a Wall Street bailout.
I generally agree with shayan... and I don't think this is something you can just wait until it's "over" -- it won't just come and go like one of those cartoony storm clouds. The other thing of concern is, suppose China sustains hyper growth during the recession. Your competition is now over there, and they won't wait. What a dilemma.
I hope pg replies to your question; would love to see his answer.
If you are a start up that will help businesses save money, or reduce fiscal risk, a down turn is good for your business.
To me it just means the same thing that you hear all over: make a good product that has tangible value, and people will pay you to use it.
My question about your startup would be along the lines of how you are getting paid - are you depending on online advertising, or is this a service you are going to sell someone? Is there any chance you can have 1 or 2 customers ready to pay you something, even a token amount, while it is in "late-alpha" stage?
True, but long periods of sluggish growth can be worse than a relatively short recession. Better to get the pain over with quickly than to spread it out over a long period - just ask someone from Japan about the 1990 to ~2004 period of very sluggish growth there. I'd much prefer a 1 or 2 year severe recession than a 14 year epoch of sluggish growth (and it can oscillate as you mention, going from positive GDP to negative and back again and still not be classified as a recession)
Thing is, it's gonna take several months to develop the product (probably code in this case) and then you have to try to market it and find paying customers - that takes time. And then customers might want additional features and changes. More time. When it's all said and done it's likely to take a lot longer than six months to get to the point where there is some cash coming in. You don't want to be in a situation where you just exhausted your six months cash and now you have to go back to work in the middle of your product development cycle. Give yourself some breathing room and have 18 to 24 months expenses on hand.
But only time will tell, there are a lot of factors, it could be delayed with interest rate cuts or forcing the teaser rate givers to honor those rates for a longer period of time, etc.
However, it's possible that the implications of Nanosolar being about to cut the price of grid electricity by 80% will bring us out of it middle of next year.