A lockdown and a recession brought about by a pandemic sound like the worst time to start working on a startup. Think again.
He who has no dog hunts like a cat” – Old Portuguese Proverb
As we write this, the world is under lockdown. Large businesses are furloughing workers, and small businesses are shutting down. By all measures, it may seem unwise to contemplate or begin work on that MVP you have been thinking about for a long time now.
Or is it?
Baron Rothschild, an 18th-century British nobleman and member of the Rothschild banking family, is credited with saying that “the time to buy is when there’s blood in the streets.” He should know. Rothschild made a fortune buying in the panic that followed the Battle of Waterloo against Napoleon.
Similar sentiments seem to prevail in Silicon Valley too. Here’s a recent tweet by Paul Graham, the founder of Y Combinator.
At Calcey, we are also inclined to agree with these views. Here’s our reasoning.
Downturns create problems that entrepreneurs can solve
Recessions create a variety of new problems, and entrepreneurs are problem-solvers at heart. Technology-based businesses typically go through a period of product development and finding product-market fit while in their pre-revenue phase. An economic downturn makes it easier to find this elusive product-market fit, since customers tighten their purse strings, thus forcing actual pain points to make themselves visible.
Easier to put together a good founding team (while big companies shed workers)
A downturn can make it easier to put together a good founding team. It is a well documented fact that the most successful founding teams usually consist of mid-career professionals who walked away from their regular jobs, either by choice or by circumstance. Going by this logic, the typical mid-career professional tends to be paid handsomely while being employed at a bigger, low-risk company during boom times. However, their handsome remuneration packages make them very vulnerable to layoffs during lean times, when large companies look to trim their fat.
And the lean times will come as they have now, and you will find many hyper-talented, experienced individuals joining the ranks of the newly unemployed. At this point, they may be willing to consider co-founding a startup, something they would have never thought about otherwise. However, do remember that for talented individuals with enviable track records, unemployment is a very brief experience. As soon as the economy shows the first signs of a recovery, they will be snapped up by larger companies. You have a small window to make use of this opportunity but don’t ever try to offer them a bad deal. Instead, talk to them and see if they are interested. See if they will make for a good co-founder, and go ahead with the hire.
You get to hone your business model in the harshest of conditions
Startups that succeed in finding product-market fit during a bear market often get there using a mix of ingenuity and a relentless focus on the product. The lack of VC funding and limited finances will force them to remain lean and agile, avoiding bloat and distractions.
Once the recession gives way to recovery, these battle-tested startups will find it easier to attract VC money. After all, it is hard to ignore the very convincing business case of a startup that convinced customers to part with their money during a time when they’d rather not.
Discipline and focus will become part of your startup’s culture
Frugality is one of Amazon’s 14 leadership principles. The company actively embraces frugality, claiming that “Constraints breed resourcefulness, self-sufficiency, and invention. There are no extra points for growing headcount, budget size, or fixed expense.”
This is very true. The most creative and innovative solutions are born when you have to make do with less. Just ask Brian Chesky and the AirBnB team, who ended up founding the lodging marketplace behemoth simply out of a need to make some extra money during the financial crisis of 2008.
You bootstrap for longer, and end up with more equity
Startups founded during a recession are more likely to have been bootstrapped, and as a result, have no choice but to focus on achieving their revenue targets. Bootstrapped startups that make it out of a recession can afford to give away less equity to any potential venture capitalists since the underlying business model is already generating cash.
Besides, with no immediate need for cash, you can take your time to carefully vet any potential investors, so that they end up being a good fit for your startup.
You can build better, at a lower cost
During a recession, prices tend to come down and smart entrepreneurs know to take advantage of this. If you are building a technology startup, the costs of hiring external service providers are also likely to be lower, compared to what it would be during an economic boom. External developers and enterprise service providers would be happy to offer you discounts and better terms. What all this means is that you get to build your product for much cheaper.
It’s easier to gain someone’s attention
There has never been a moment in recent history where the entire world is at home, free from the many distractions which compete for our attention everyday. As a result, people will be in a better state of mind to listen to new ideas, ruminate on them, and actually respond. So, if you are thinking of pitching a new idea to a customer or a potential co-founder, this is the time to go for it.
Isn’t that great?
If you are working on an MVP, a full-blown app, or something similar while on lockdown, why not give us a call? We are working remotely too, and would be happy to see how we could help!