Why founders benefit from starting new companies during a recession

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	Forwarded this email? Subscribe here for more Boom time startups vs Gloom time startups Why founders benefit from starting new companies during a recession Aug 5   READ IN APP   Why starting a company during a recession can be a good thing The stock market is a little bloody today, so it’s about time to write this essay. When the startup market is booming, people become eager to start up new companies. Money’s flowing, there’s lots of excitement, everyone’s experimenting with new tech, and you hear/read about fast growth and instant riches. It’s during the boom times that fortunes can be made — and this view has been part of Bay Area culture ever since the Gold Rush days of the 1800s. Thanks for reading @andrewchen! Subscribe for free to receive new posts and support my work. Pledge your support But any founder who’s operated during this period also finds out all the downsides of boom time startups: You’re competing against 100s of other similar-sounding startups for funding Nobody wants to work for you, since they’re all working on their their own startups. Or you have to compete with multi-million dollar pay packages offered by billion dollar companies Everything costs more. Office space, vendors, domain names, and everything else is 2X or 5X what it usually costs There’s a blizzard of competition and new teams emerge all the time with similar-sounding products. Customers are mercenary, trying out multiple products but never committing Lots of idiots emerge with fake startups, but get funded nevertheless. A big hype bubble emerges across the space and it gets a little too commercial a little too fast. Sometimes products need time to bake, to become real, and if a space moves too fast, customers (and investors) will get burned Intense time pressure comes with moving fast, because growth needs to be fast. When you hear about other products going 0 to $1M ARR in weeks, it sets a high bar. And even if you get there, sustaining it is even harder It’s hard to get to know investors, who end up being too busy and thus unhelpful. But on the other hand, you’re supposed to raise your seed termsheet in 48 hours during the boom time, at the highest valuation possible, and it’s hard to have the time If this is sounding familiar, it’s because it’s what I personally experienced in the mobile boom, Web 2.0 boom, “Uber for X” boom, the ZIRP boom, and today the AI boom. There are huge benefits of these booms of course, because we see wild experimentation that eventually tells the industry where to go. I often hear experienced founders tell me the opposite, saying that starting a company during a gloomy period in the economy — a gloom time startup — has huge benefits: Quality and business fundamentals rise to the top. If you’re working on something great, and it works and has product/market fit, you’ll eventually find investors and traction and revenue. As they say, “Be so great they can’t ignore you” There’s fewer tourists, and less hype. Many of the boom-time founders will have gone back to their comfy FAANG companies, and the hardcore founders will work hard during a recessionary period. Instead of getting distracted by hype, instead gloom time founders can get heads down and work in peace Competition is less fierce. Your customers are getting fewer random cold emails from starutps, so a note from you will be more intriguing. There’s fewer pitches going to investors, and fewer content collaboration pitches going to podcasters and creators. This means response rates will be higher, and people will be more willing to partner You get to know your investors better, as you spend time with them over a few weeks, instead of 48 hours. If someone is going to be permanently part of your journey, and you have to talk to them every month for potentially a decade+, you probably want to be careful who you work with. Now there’s time to do that Instead of expecting 5X annual growth, while burning a ton of cash, instead the expectation will be more reasonable — maybe 2-3X, with high cash efficiency. For founders who prefer to have strong foundations in their business model, this is just much better You’ll read the above and quickly realize that boom time startups and gloom time startups really operate with different strategies. And it might be true that founders who excel at one end up being poor at the other. For folks who are building solid, foundational businesses, and want to grind hard over many years, starting a company during a recession ends up potentially working great. Riding the wave Of course it’s never a boom forever, nor gloom forever. These things are cyclical, and one naturally leads to the other. When I moved to Silicon Valley in 2007, I experienced this first hand. Things were not booming quite yet, but it was exciting to see Web 2.0 in full swing with Flickr, YouTube, and MySpace. And if you traced the history of these products, you’d see that they were all built by folks during the gloom. If you were heads down in the post-bubble period of tech, between 2002-2007 let’s say, you had the advantage of having time to really figure out the new physics of the Internet. It became a great time to experiment with user-generated content (aka Web 2.0), ecommerce, ad networks, SEM/SEO, etc., without all the crazy hype that would later accompany it. But if you built something real during that period, you would hugely benefit a few years later. That’s because after the GFC, where it was clear that companies like Facebook would be very valuable, and mobile platforms exploded, the folks who were operating during the gloom period had the skills/expertise to launch the next wave of companies. The PayPal alumni is a great example of this, which was a network of folks that build throughout the post-bubble gloom period, then launched a huge number of companies - Yelp, LinkedIn, YouTube, Yammer, etc - the period right after. In other words, if you are lucky with timing, you can begin by building in a gloom period and as you scale, sometimes the boom times hit. That’s almost ideal. Gloom or boom? I write this essay as we go through a few rough weeks, both economically and politically. A lot of folks that are on the sidelines might be asking themselves, is this a good time to start a company? Or is it better to turtle up in a safe job? As I described earlier, I think starting a company in a bubbly vs recessionary period are almost very completely different strategies that suit different personality types. You might ask yourself some questions: Are the problems you are most interested in “of the moment?” You want to quickly jump into AI, VR, or web3, or some other cutting edge tech? Does your idea benefit hugely from certain economic factors (like real estate does, with interest rates?), or from a foot race around a new emerging trend? Do you enjoy being “in the scene” — whether that’s IRL or on X — or are you more of a heads down grinder? Is it fun to build hype, and tap into the excitement of an ecosystem? Is your strategy more high-growth, high-burn — particularly if your industry/product dictates it (like deep tech, or foundational AI models, etc) — or do you prefer the idea of working through a highly capital efficient idea over years? If you knew that you were going to build something that might take 10+ years, versus a 2-3 year flip to an acquirer, would that change your mind on the area? These are the kinds of questions that you need to ask to figure out what kind of founder you are, because there are different types. The ones that end up building low-key SaaS companies that efficiently grow into big hits aren’t the ones that quickly flip their buzzy consumer companies a few years in. And that’s fine! Figure out which one you are. Ultimately though, I hope many of you who are thinking of building a new startup are undeterred from the economic turbulence we’ve recently seen. There are huge benefits from building something new when things are a little slow. And they help create the opportunities for the next wave. Plus, during a recession, that cushy job you think you have isn’t that safe anyway :) Thanks for reading @andrewchen! Subscribe for free to receive new posts and support my work. 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