

Ask YC: What do you do if American economy enters a downturn? - riobard

An economic downturn seems to be very soon. What do you do then? Will there be many startups break down?
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jyu
Even with economic downturns, there are still some fundamental truths that
will prevail, and industries that grow during recessions. Use these trends to
your advantage. For instance, businesses always want convenient ways to make
more revenue/profit and cut costs. And curiously, Hollywood also tends to grow
during recessions: [http://www.phillyburbs.com/pb-
dyn/news/80-03102008-1501254.h...](http://www.phillyburbs.com/pb-
dyn/news/80-03102008-1501254.html)

Most startups break down no matter what the climate. An economic downturn may
be a contributing factor, but not the main culprit.

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mattmaroon
How many times must this question be posted here before people learn?

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wehriam
There are a few factors at play that keep me optimistic.

First, the web continues to attract double-digit increases in advertising
dollars. While this growth might slow, it seems unlikely to reverse. This
means the web industry will continue to expand even if the economy as a whole
does not.

Second, when the economy slows people tend to save and invest instead of
spending. Given that many startups are driven by angel investment or venture
funds, that's a good thing.

Third, web based and open source technologies are making huge gains in big
business. They'll be increasingly attractive as companies tighten their belts.
Given that the YC crowd is focused on this sort of development, that puts us
in an enviable position.

I would start to worry if Google, Yahoo, Microsoft's web division, IAC, etc
start making big layoffs. They could flood the market with competent
programmers, driving down market rates and increasing competition for
investment dollars. (Although I'm sure there are some companies fighting for
talent that would love for that to happen.)

I think there's a greater risk of VCs moving to greener pastures - solar,
biotech, etc - as web applications become commoditized.

~~~
david927
In a downturn:

1\. advertising dries up completely. 2\. people tend to curb risky financial
moves, such as early stage capital 3\. businesses will cut back on almost all
new development

The big question isn't, "Will it get bad?" but "Just how bad will it get?"

~~~
wehriam
Look at this graph of television ad spending over the last 30 years -
<http://www.nextcenturymedia.com/images/Image3.gif> \- (the associated article
- [http://www.nextcenturymedia.com/library/dougross-
article-b.h...](http://www.nextcenturymedia.com/library/dougross-
article-b.htm) \- is less pertinent.) While there is a noticeable lack of
growth during recessions, it's anything but _dried up completely._

Jeff Bussgang does a nice job of explaining why VC funds are more attractive
to investors during a downturn -
[http://bostonvcblog.typepad.com/vc/2008/01/whos-afraid-
of.ht...](http://bostonvcblog.typepad.com/vc/2008/01/whos-afraid-of.html)

The sky is not falling.

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andr
Geographic arbitrage (i.e., use my open airplane ticket to Europe). Web 2.0
companies have an advantage no business has had in the past - instant
mobility.

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indie01
Remember that shifts are cyclical, temporary, and not the end of the world. Be
happy for other countries which are finally getting a break.

~~~
SwellJoe
Unfortunately, when the US economy has a downturn, the world economy follows.
See the Nikkei's dip following a larger dip in the US last week. Obviously,
the EU is providing a much needed foil to the phenomenon, but it's still a
fact of life. As the US economy goes, so goes the world.

Of course, optimism will spike when the new president takes office, and we'll
see at least a short bubble early in 2009. Whether it will end up having a
permanent impact on the economy is another matter...

Anyway, smart startups are better equipped to deal with downturns than larger
companies, despite the common "retreat to quality" wisdom that a couple of
articles have talked about recently. Fewer employees, the expectation to run
unprofitably for a year or two built right in, and a much tighter fist holding
the cash. Dumb startups would fail, regardless, and those businesses in
between small startup and mid-sized business--the no mans land where many
"successful" early stage startups fail--is probably even more dangerous during
a downturn. So, be thankful you're a smart early stage startup! (And, if
you're in no man's land with a million or ten in revenues and no clue how to
scale to the next level and steadily increasing expenses, best of luck to you.
You'll want to hang on tightly, keep your hands and feet in the car at all
times, and hope the rails carry you out the other side safely.)

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skmurphy
Focus on creating value for your customers. Startups are inherently risky, but
more mistakes are made when times are good than otherwise because teams are
more careless. A downturn is a great time to start a software company that
provides value to its customers.

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ken
I believe Bram Cohen said something along the lines of "Programmers don't take
vacations any more. They just wait until their current company implodes, and
then take a little time off before finding a new one."

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ardit33
if you are young, and single and with a normal job:

1\. Make sure you are in good terms with your parents, or sister/brother, so
if you loose your job, you can live in their basement for a while.

2\. If you loose your job, now it is the best time to work on that idea... for
reals. Necessity is the mother of all inventions.

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davidw
Probably. But others will spring up in their place, and will have less of a
frothy environment to grow in.

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s_baar
You work smarter, and cut out the fat of what you do. Then you abolish the
Federal Reserve.

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sharksandwich
lay off two members of my personal mariachi band

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gcheong
same thing I do when the economy enters a boom period.

