

Ask YC: Is there a recession/depression coming? - CarpeDiem

The economy seems to be heading to a recession, but how will this affect the internet startup world?  I ask because I am planning on quitting my job with the federal government to start my own startup in January.  And no, I can't keep the job and do the startup, I've been trying for 8 months to do that.  Is venture capital going to dry up?  How about online advertising revenue?  Should I wait until the recession is over?
======
pg
It doesn't matter. First of all, it is notoriously impossible for anyone
except a few pros (if even them) to time the market. So don't even bother
trying. Just live your life.

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.

~~~
mattmaroon
Unless maybe your startup is called
stufftodowhentheeconomyisnotinarecession.com.

~~~
brlewis
Uh oh. I'm toast.

------
skmurphy
A recession is the best time to start a firm. Most companies make more
mistakes and develop more bad habits when times are easy than when times are
tough. It may take tough times to uncover the bad habits you developed and the
unrealistic assumptions that you made when times were good, but it's the bad
habits that are responsible, not tough times.

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.

~~~
webwright
This is a great point, IMO. I'd add to it that, if you have a choice, SOLVE A
PROBLEM. A recession is certainly a good time to solve a business problem
(save your customers time/money) but may not be as good a time for an ad-
supported social "fun" site.

Either way, keep it lean (in terms of investment and burn rate).

~~~
nostrademons
Recessions are good times to for social "fun" sites too - HotOrNot, Blogger,
LiveJournal, PlentyOfFish, Flickr, and Friendster were all started either
right before or during the 01-02 recession, and Disney got its start in the
middle of the Great Depression. You just gotta keep your cash outlays less
than expenses, find a revenue stream other than advertising, and build
something attractive enough that at least _some_ people are willing to pay for
it.

~~~
rms
They're good for alcohol sales too; hopefully it'll trickle down into the more
obscure drugs.

------
shayan
I would say recession is kind of here, and coming (but def not depression,
technically speaking the economy is going through depression, when it has been
in recession for a couple of years and not coming out). but in terms of should
you wait for it to go away, I really don't think so. If you have an idea then
you should def implement it now, otherwise it will be too late for it. But you
have to realize that if in case there will be a recession, then finding jobs
might not be as easy either. So if you don't think you can live and sustain
the startup life for a while, then you should be careful quiting your job.

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.

------
bootload
_"... The economy seems to be heading to a recession, but how will this affect
the internet startup world? ..."_

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/...](http://www.theage.com.au/news/technology/fast-forward-
to-08/2007/12/03/1196530575337.html)

------
ctkrohn
A recession could potentially benefit startups by making venture capital more
attractive than traditional investments. During a recession, you expect the
Fed to lower interest rates, making traditional bonds less attractive. Stocks
won't be very appealing either, since they tend to slide 20-30% in a
recession. The once-enormous market for exotic structured investments (e.g.
CDOs, ABS, SIVs, CMOs, whatever) has nearly dried up.

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.

------
run4yourlives
It's really irrelevant from your p.o.v. when you really think it through.

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!

~~~
fauigerzigerk
That sounds logical but unfortunately it's not that simple. In 2001 I was part
of a telecom related startup. All of the telcos were severely affected by the
downturn, not just the bad ones. After the bubble burst nobody would do any
deals that didn't have a positive effect on the balance sheet within that same
quarter. So, effectively, they just stopped to launch new services. They all
just stopped at the same time. Period. End of story.

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 :-)

------
CarpeDiem
Wow, thanks for all the comments!

@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 ;-)

~~~
shayan
Since I have no idea what your product is, how big your team is, how much
experience you have and what resources you have access to, it is hard to say
how much saving is good and how much time you can spend with it (since the
costs are also unkonwn).

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

~~~
CarpeDiem
We already have a feature complete beta, we've been working on it for 8 months
while keeping the day jobs. Most of the remaining work to do before we launch
is superficial, just refining the UI and "making it pretty". We have been
actively seeking money, but have gotten blank stares from investors when we
explain that we have kept our day jobs thus far. So, I think I am agreeing
with what you're saying, thanks for the input!

~~~
nostrademons
What market are you in?

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.

------
russ
Ironically, your username is carpe diem!

------
joeguilmette
What do you think is going to happen when the dollar crashes, oil costs
US$200/barrel, and we can't borrow money from the Chinese (or anyone) anymore?

I, for one, am buying a bike while the steel is still exchangeable for all
that green paper I have lying around.

~~~
Tichy
less driving -> more internet usage

------
ocamlback
Recession - yep, in fact we're probably in one already. Too much wealth is
being destroyed in this mortgage crunch/housing decline. Depression, though?
Not likely - though I have heard very well connected folks say that we're
probalby at the greatest risk of a depression since the 30's. Still, that risk
is probably something less than 5%.

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.

------
optimal
The tide goes out, then comes back in. Those not on the margins should be
fine.

Carpe, are you sure you don't want to keep your govjob while working on the
startup?

------
nickb
I'd say we're very close to recession. Even Morgan Stanley says we're gonna
enter recession soon:

[http://www.telegraph.co.uk/money/main.jhtml?view=DETAILS&...](http://www.telegraph.co.uk/money/main.jhtml?view=DETAILS&grid=A1YourView&xml=/money/2007/12/11/cnusa111.xml)

~~~
whacked_new
Expletive deity, just this report? That triggered the 2+% drop in the last 2
hours!??!?

~~~
ctkrohn
No. The Dow's large drop today was triggered by the Fed cutting the fed funds
target rate by 25 basis points (0.25%). Stock market investors were hoping
that the Fed would cut 50 basis points, giving a further kick to the economy.
However, cutting interest rates by too much at one time can make money too
easy, adding to inflation pressures.

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.

~~~
rms
I think it's terrible that the Feds keep cutting interest rates. All it's
doing is propping up Wall Street at the expense of individual citizens and the
value of the US Dollar -- kind of like how China keeps the Yuan devalued at
the expense of ordinary citizens. The last time the Feds cut interest rates
this much, it caused a housing bubble.

~~~
ctkrohn
There are certainly risks to cutting rates: it hurts our currency and
increases inflation risk. I don't think your analysis is correct, though.
First of all, the Fed hasn't been continuously cutting rates: the first cut
was in September, after several years of continuous increases. Since then,
they've only cut the Fed Funds target rate (the rate at which banks can lend
to each other overnight) from 5.25% in summer 2006 to 4.25% now... a drop of
only 1%.

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.

~~~
rms
Do you think that the Bush level of deficit is sustainable? If not, what will
happen to the US Dollar and the average US citizen? I can understand why it is
reasonable to lower interest rates, but it seems to be ignoring the much
bigger problem.

~~~
ctkrohn
The deficit is certainly a problem, and it is not sustainable. However,
interest rates don't really have much of an effect on the deficit. Sure, the
government has to borrow money at a rate determined by the market -- why would
anyone invest in a government bond paying, say, 2% when you could get a AAA
corporate paying a much higher rate? But Congress has unfortunately shown a
willingness to borrow money regardless of the interest costs. Keep in mind
that short-term government interest rates were in double digits for most of
the Reagan 80s, when the deficit was massively expanding.

------
whacked_new
I'm not educated about this, but I'm guessing that recession means less
mobility and smaller spendings. Perhaps a good project would help people save
money or make wiser purchases. Perhaps Netflix will eat everybody up (although
I don't know much about it). Perhaps services that facilitate something
between people who are physically in proximity, like Craigslist, will eat
everybody up.

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.

------
dpapathanasiou
SAI has a "Recession Watch Timeline" you might be interested in:
[http://www.alleyinsider.com/2007/12/recession-watch-
morgan-s...](http://www.alleyinsider.com/2007/12/recession-watch-morgan-
stanley-finally-sees-weakness.html)

------
jdavid
1\. VC funds are already committed, so that is one point. 2\. people are
easier to hire in a down turn, so its cheaper.

If you are a start up that will help businesses save money, or reduce fiscal
risk, a down turn is good for your business.

------
npotter
I agree with everyone about not waiting to start, but there are ways in which
you may have to adjust your business model to account for a global lack of
credit, especially when US consumers are so dependent on credit for spending.
I think the value of internet ads is going to drop substantially over the next
few years as a result of much more sluggish consumer spending.

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.

------
patrickg-zill
Just a note, recession strictly defined means 2 quarters of decline. If there
is 1 quarter of decline, then 1 of gain, then another of decline, there is no
recession.

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?

~~~
ocamlback
"Just a note, recession strictly defined means 2 quarters of decline. If there
is 1 quarter of decline, then 1 of gain, then another of decline, there is no
recession."

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)

------
lowfat
Just make sure you have enough savings to let you focus your efforts on your
startup - maybe 6 months worth of expenses - so that recession or not, you
will be okay.

~~~
ocamlback
6 months is fine in normal circumstances, but if you're going to quit a very
safe job and start a company of your own you probably want to have a good deal
more than six months worth of expenses on hand - probably more like 2 years
given the current economic outlook.

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.

------
mrtron
I have had that feeling for about a year that there will be a pretty sizeable
downturn coming, and it will probably last a fair while.

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.

------
Hexayurt
Yes, of course a recession/depression is coming.

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.

------
yawl
If you ask 100 people and you will get 100 opnions. There is definately a
chance for recession, but it is hard to judge the scale and do the timing
right.

