5 reasons to start a company in a recession, according to Paul Graham, who founded Silicon Valley's most successful startup factory
- In a 2008 essay, Paul Graham, one of the founders of Y Combinator, made the argument for starting a company in a bad economy.
- He believes that the state of the economy is inconsequential compared to the strength of the founding team.
- "If we've learned one thing from funding so many startups, it's that they succeed or fail based on the qualities of the founders," Graham wrote in his 2008 essay. "The economy has some effect, certainly, but as a predictor of success it's a rounding error compared to the founders."
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About a month before Paul Graham wrote one of the first checks to Airbnb, at the peak of the global financial crisis, he wrote about why to start a company in a bad economy.
The essay was written in October 2008, but it has important lessons for aspiring founders during the coronavirus outbreak. Its effects on the markets represent the first economic crisis after a decade-long bull market, which could make it harder for startups to raise outside funds or hold onto customers.
Graham, one of the founders of Y Combinator, the most successful startup accelerator based on number of exits, explains that the right group of founders can build a thriving company in any conditions.
"It's the people that matter," Graham wrote. "And for a given set of people working on a given technology, the time to act is always now."
You can read the full essay on Graham's website.
Here are five reasons to start a company in a bad economy, according to Graham:
'The state of the economy doesn't matter much either way'
His essay makes the argument that, good or bad, the state of the economy is pretty inconsequential.
"If we've learned one thing from funding so many startups, it's that they succeed or fail based on the qualities of the founders," Graham wrote. "The economy has some effect, certainly, but as a predictor of success it's a rounding error compared to the founders."
His advice to solo founders is to spend more time on the search for a cofounder. Their contribution has a greater effect on the company's outcome than the state of the economy, Graham said.
'Technology progresses more or less independently of the stock market'
An economic depression is probably not the best time to start a restaurant, as people are likely to eat out less.
The same logic doesn't apply to the technology sector, Graham said.
In his essay, Graham pointed to Microsoft's founding during the 1970s oil crisis as proof. Its first product was a programming language interpreter for an early personal computer, at the start of the personal computer craze.
"That was exactly what the world needed in 1975," Graham wrote, "but if (Bill) Gates and (Paul) Allen had decided to wait a few years, it would have been too late."
'Make things that save money'
An economic depression can be a great time to start company that helps customers save money.
"It's not necessarily a problem if customers feel pinched: You may even be able to benefit from it, by making things that save money," Graham wrote.
Y Combinator graduate Airbnb provides a case study.
Airbnb's founders had failed to raise venture capital at the end of its first year and nearly called it quits. The startup, which was then called Airbed and Breakfast, entered the accelerator in a last-ditch attempt to save the business.
Graham said in a tweet on Thursday that "one of the reasons they started to grow during the winter was that, during the recession, hosted needed the money to pay their rent."
"Airbnb raised their first round of capital after YC at the worst possible time: March 2009, the month the market bottomed," Graham said in another tweet. "They raised at a pre-money valuation of $2.4 million. It didn't matter. They did fine, because they had made something people wanted."
There will still be jobs for great hackers
"What if you quit your job to start a startup that fails, and you can't find another? That could be a problem if you work in sales or marketing. In those fields it can take months to find a new job in a bad economy," Graham said.
"But hackers seem to be more liquid. Good hackers can always get some kind of job. It might not be your dream job, but you're not going to starve."
'Another advantage of bad times is there's less competition'
In bad times, Graham said founders who would start companies instead go to graduate school. The data suggest a record number of graduate business schools saw increases in the number of applications they received in 2008.
The departure of would-be founders is a good thing for those who are able to build companies.
"Technology trains leave the station at regular intervals," Graham wrote. "If everyone else is cowering in a corner, you may have a whole car to yourself."