One of the most interesting questions entrepreneurs have asked me recently is “Should I start my company now, or wait until the economy picks up?” A perfectly valid question to which there is no definitive answer to. Even in a healthy economy, factors such as access to capital, connections with big players in the market, skill and dedication of the founding team, revenue model, etc should all be taken into consideration when deciding whether or not to pursue an idea. If these and many other variables are always present, what makes the current economic climate so different? In my opinion there are three primary differences in starting a company in a down economy.
1. Less competition. Starting a company is hard. The wanna-be’s will likely give up, if they get started at all. This is a plus in my book.
2. Less money. Yes, October 2008 was real and VC money is now twice as expensive as it was last year. Anecdotally, I heard from a very prominent early stage investor that about 1 in 100 ideas are being funded right now, and deal flow is down 50%. Depending on the founder’s financial situation this could be good or bad. If you have enough savings to boot strap a while, you’ll get a big head start on competitors and be in a great position once money starts flowing again.
3. Business models. Even existing, proven business models are struggling, as we know. As a new startup, I believe your model must cater in some way to the current macro-economic situation. Personally, I believe there is a lot to be done within education, recruiting, and performance marketing that could prove very interesting.
Obviously, existing companies, large and small are also affected. I had the pleasure of attending a round table event by Dealmaker.com called When the Going Gets Tough, the Tough Change Their Business Model. During this event, four experienced startup founders (one of whom I work for) discussed how their respective companies shifted strategies in the past. It turns out two of the founders changed strategies due to last year’s economic breakdown and are now doing quite well. This should also apply to companies that don’t exist yet, right?
