Should You Start a Company in a Downturn?

Fabrice Grinda writes:

There is no better time to start a company!!

The opportunity cost has decreased as many high paying jobs have disappeared and employment opportunities in general have lessened. If you have a job, companies will have less room to give generous bonuses and/or raises.

It’s going to be harder for entrepreneurs to raise money, but competitive pressures decrease dramatically in downturns giving you more chances to establish yourself as the leader in your field and more time to do so. ….

When I launched Zingy in September 2001, we essentially had no competition. The online advertising market had completely dried up allowing us to buy billions of advertising impressions for $10,000! The lack of competition proved critical to our success given that it took two years for the company to start establishing itself in the marketplace….

One difference between today’s downturn and the 2001 dot-com bust is that the economic woes of 2008 seem to be hitting a wider range of industries. The dot-com meltdown started and emanated out of Silicon Valley. It was a good reason to start a tech company because, as Fabrice notes, there was ample talent, less competition, etc.

Today’s economic challenges are affecting many of the customers to whom a new company sells as well as partners in other industries and manufacturers abroad. Thus the external conditions are a little tougher, I think.

I read one blog post recently where a guy said something to the effect of, "There’s never been a better (or more necessary) time to start a company that fills a customer need, is efficient with cash, and can be profitable right away." Well, yes!

The fundamentals of business have not changed.

7 Responses to Should You Start a Company in a Downturn?

  1. Scott says:

    What do you think the prospects are of starting a Process Improvement consulting business? It seems to me, on one hand; many companies will have to face cut-backs and have diminished availability of discretionary budgets; on the other, there may be a blossoming need for outside help in lowering operating costs. Where does this type of start-up fit into the current landscape of the economy?

  2. I totally agree that it’s the best time to start as long as you’re able to obtain funding. You can adapt to the shifting market needs while other companies are scrambling just to stay afloat. It teaches you to be efficient with little money and resources and forces you to be extra-creative and proactive in your marketing.

  3. Ben Casnocha says:

    Scott — I agree that businesses which can clearly save customers money will thrive. I don’t know if “process improvement” companies fit in this box.

  4. Shhhh, don’t tell anyone, but I’ve been stepping up my sales efforts during this economic downturn. And, wonder of wonders, I’m finding that there is business to be had out there.

  5. Krishna says:

    @ Scot and Ben – “Process improvement” consulting is always in demand so long as you aid business transformation thro reduction of complexities, wastage or costs. More than ever during these tough times.

    But the challenge is that you are up against the big guys. Accenture, IBM, HP, EDS are all into this big time. Their clients now mandate large long term contracts to these vendors only if they commit on upfront ROI and even reduce it from the contract value in the document. Let’s say if it is a $1 bn contract over a period of five years and the vendors claim they can deliver a 15% savings, the vendors are asked to shell out $150 mn upfront either by way of payment or by way of matching reduction in contract payout.

    It throws up an opportunity to act as a sub-vendor to these biggies or alternatively focus on SME clients, where your margins could be a lot thin, contract sizes a lot smaller.

  6. Shefaly says:

    A business that is not capital intensive, that delivers real value applicable to the hard times but also in good time, and where you have a demonstrable track record is the one to start in these times. For the entrepreneur, thinking differently about one’s skills is a prerequisite.

    In a recent post, ‘Only the monetising survive’, I mentioned my dressmaker. When times are good, she does custom tailoring as well as personal shopping, which are expensive but high value add services; in dire times, she can mend and update people’s wardrobes for much less money and she has a constant supply of work. She is also a dab hand at other sewing jobs such as curtains and upholstery. She is never out of work.

    One has to think about those skills that can be applied to many situations and seek those situations out.

    Interestingly, while banking sector is losing people, regulators in all financial sectors are hiring – just another example of repositioning one’s skills to deliver demonstrable value.

  7. Jun Loayza says:

    Hey Ben,

    We have really felt the pressures of this economic downturn. Our original model was to get a user-base, approach investors, demonstrate our traction, get funding, build a strong business model.

    Because investors are no longer funding, we have had to switch from a user-first model to a revenue-first model. It has really tested the team moral and belief in the company.

    The awesome thing is that our company is as strong as ever. I can honestly say that we have risen up to the challenge and that we have developed a strong business model for Future Delivery.

    Hopefully it goes through. We’ll see in a month!

    Jun Loayza

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