
Why to Start a Startup in a Bad Economy (2008) - razin
http://paulgraham.com/badeconomy.html
======
awb
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.

~~~
hef19898
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.

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brenden2
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.

~~~
the_watcher
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.

~~~
dntbnmpls
> 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.

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stoicShell
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.

~~~
tryitnow
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.

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5445455
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.

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

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

[https://en.wikipedia.org/wiki/Four_Yorkshiremen_sketch](https://en.wikipedia.org/wiki/Four_Yorkshiremen_sketch)

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quaquaqua1
> _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.

~~~
zachthewf
"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.

~~~
gbear605
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.

~~~
SpicyLemonZest
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.)

~~~
vikramkr
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.

------
JohnFen
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.

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rexreed
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

~~~
holler
> 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?

~~~
rexreed
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.

------
sebastianconcpt
_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._

~~~
hef19898
One of PGs most influential essays, at least for me. If anything, the
emergence of cloud services made start-ups even cheaper since 2008.

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inventtheday
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.

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wexxy
Can I pay my rent in startup ideas?

~~~
cmauniada
Ideas are worthless.

~~~
JohnFen
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.

------
travisjungroth
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.

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greendave
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.

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bernardlunn
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...](https://readwrite.com/2009/04/30/what-do-vcs-say-and-do-in-early-
stage-today/)

------
catchmeifyoucan
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](http://www.paulgraham.com/vb.html)

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simonswords82
Sweat equity increases in value as the amount of money being invested in
startups diminishes

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EGreg
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

~~~
helen___keller
> 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.

~~~
EGreg
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.

