Ask YC: How will the US economy affect the probability of startup success
In particular how do a recession, rising oil prices, weak dollar, credit crunch affect the probability of startup success. Is this a good time to quit your "safe" day job and dive in head on into a full time startup attempt.
13 comments
Good god, pay attention to the world around you people.
1> different kinds of businesses do well in recessions vs. boom years. adapt your start up plans to be "countercyclical."
If you're not sure what kinds of businesses are countercyclical, are you sure you're old enough to be doing this?
2> prioritize international markets. capital bleeding out of the US because of inflation and currency shrinkage is going somewhere. those people are your customers too.
3> Flint, Michigan. Yes, it can happen here. Entire classes of businesses can just vanish. Programming jobs go abroad eventually (yes, yes they do - your professors are not the only smart Indians, Chinese, Japanese, Russians, Koreans, Israelis etc. in the world.) Which business are you in? Being smart guys? Or serving a particular customer base better than your immigrant professor's cousin who stayed at home can?
Do a bit of reading about the Great Depression. Now re-run that, maybe 50% as extreme, but this time with the internet. Where would you like to have been positioned in 1927 or 1928 to survive in good shape?
If you want a closer example, examine the Argentine Economic Collapse (1999).
http://en.wikipedia.org/wiki/Argentine_economic_crisis_(1999-2002) - you will have to cut and paste that link, including the bracketed dates.
We don't know that is going to happen but it's a scenario that should be examined in your mind because if a funder asks you "so what's your plan if the dollar drops to be 20% of it's current value against the Euro and the Yen?" the answer should not be "what are you talking about?"
In short: get beyond marketing to the American consumer, because there's a 5%-15% possibility that they're going to be entirely wiped out within the next couple of years. Think Former Soviet Union style conditions (relative to where we are even now.) Now try to imagine keeping your business going. Note the percentages - I don't think this is what will happen, but I'd say it's improbable-but-possible.
As a business person, it's a systemic risk that your business plan should take into account. If it doesn't, you're still in the little leagues, assuming that the relatively stable economic conditions that have prevailed during most of your life time are baseline reality. They aren't - that's summer. Winter may be just around the corner. Say 1 in 6 or less.
By the way, I also do children's parties, weddings and Bar Mitzvahs.
1> different kinds of businesses do well in recessions vs. boom years. adapt your start up plans to be "countercyclical."
If you're not sure what kinds of businesses are countercyclical, are you sure you're old enough to be doing this?
2> prioritize international markets. capital bleeding out of the US because of inflation and currency shrinkage is going somewhere. those people are your customers too.
3> Flint, Michigan. Yes, it can happen here. Entire classes of businesses can just vanish. Programming jobs go abroad eventually (yes, yes they do - your professors are not the only smart Indians, Chinese, Japanese, Russians, Koreans, Israelis etc. in the world.) Which business are you in? Being smart guys? Or serving a particular customer base better than your immigrant professor's cousin who stayed at home can?
Do a bit of reading about the Great Depression. Now re-run that, maybe 50% as extreme, but this time with the internet. Where would you like to have been positioned in 1927 or 1928 to survive in good shape?
If you want a closer example, examine the Argentine Economic Collapse (1999).
http://en.wikipedia.org/wiki/Argentine_economic_crisis_(1999-2002) - you will have to cut and paste that link, including the bracketed dates.
We don't know that is going to happen but it's a scenario that should be examined in your mind because if a funder asks you "so what's your plan if the dollar drops to be 20% of it's current value against the Euro and the Yen?" the answer should not be "what are you talking about?"
In short: get beyond marketing to the American consumer, because there's a 5%-15% possibility that they're going to be entirely wiped out within the next couple of years. Think Former Soviet Union style conditions (relative to where we are even now.) Now try to imagine keeping your business going. Note the percentages - I don't think this is what will happen, but I'd say it's improbable-but-possible.
As a business person, it's a systemic risk that your business plan should take into account. If it doesn't, you're still in the little leagues, assuming that the relatively stable economic conditions that have prevailed during most of your life time are baseline reality. They aren't - that's summer. Winter may be just around the corner. Say 1 in 6 or less.
By the way, I also do children's parties, weddings and Bar Mitzvahs.
If you're going to consider the possibility that the U.S. economy will go into a full-fledged collapse, you should also consider:
1.) The possibility of large tariffs on all international transactions.
2.) The possibility that certain nations will be declared "enemy powers" and all trade with them will be banned.
3.) The possibility that all communications outside the United States (yes, that means the Internet) will be banned for national security reasons.
4.) The possibility that the government will nationalize the Internet, your business, or both.
5.) The possibility of riots in major U.S. cities.
6.) The possibility that a mandatory draft may send you or your workforce to war.
7.) The possibility of mass propaganda campaigns and government nationalization of all media.
8.) The possibility that all computer professionals will be drafted into massive cryptographic projects.
All of these have happened historically after major economic crises. They almost seem to be inevitable after a Depression-level panic.
My point is that some eventualities shouldn't be planned for, not because they won't happen, but because you can't plan for them. Once political unrest starts, all bets are off, because the basic ground rules of society are gone. Some looter could come up to you with a gun and blow your brains out, and that would be the end of your business.
1.) The possibility of large tariffs on all international transactions.
2.) The possibility that certain nations will be declared "enemy powers" and all trade with them will be banned.
3.) The possibility that all communications outside the United States (yes, that means the Internet) will be banned for national security reasons.
4.) The possibility that the government will nationalize the Internet, your business, or both.
5.) The possibility of riots in major U.S. cities.
6.) The possibility that a mandatory draft may send you or your workforce to war.
7.) The possibility of mass propaganda campaigns and government nationalization of all media.
8.) The possibility that all computer professionals will be drafted into massive cryptographic projects.
All of these have happened historically after major economic crises. They almost seem to be inevitable after a Depression-level panic.
My point is that some eventualities shouldn't be planned for, not because they won't happen, but because you can't plan for them. Once political unrest starts, all bets are off, because the basic ground rules of society are gone. Some looter could come up to you with a gun and blow your brains out, and that would be the end of your business.
Depends how much cash you have. The defining feature of recessions tends to be that cash is harder to come by - it's harder to find investors, and it's harder to get people to spend money.
The flip side is that anything that cuts cost and saves people money in a recession does well. Also, if unemployment goes up, people tend to have more time on their hands, which benefits attention-based businesses. It's just that converting that to cash becomes more difficult. Advertising spending tends to drop like a rock in recessions.
If you're likely to run out of cash during the recession, don't quit, because it'll be very difficult to find more. If you have enough to make it through to the other end, you can do very well. Business activity doesn't stop in recessions, it just slows down, and you can do all the strategic aspects (building a product, getting market share, building brand recognition) just as well as in boom times. Better, really, since recessions tend to flush out competitors.
The flip side is that anything that cuts cost and saves people money in a recession does well. Also, if unemployment goes up, people tend to have more time on their hands, which benefits attention-based businesses. It's just that converting that to cash becomes more difficult. Advertising spending tends to drop like a rock in recessions.
If you're likely to run out of cash during the recession, don't quit, because it'll be very difficult to find more. If you have enough to make it through to the other end, you can do very well. Business activity doesn't stop in recessions, it just slows down, and you can do all the strategic aspects (building a product, getting market share, building brand recognition) just as well as in boom times. Better, really, since recessions tend to flush out competitors.
In the early 2000, we had Asian financial crisis, Y2K, dotcom bomb, telecom burst, stock market crash, 9/11 attack, war in Afghanistan, SARS, launch of the Iraq invasion, outbreak of avian flu, but yet in retrospect, it was the best time to do a startup. So you can't really differentiate with good timing. But you can differentiate from bad timing. When it is difficult for you, it is also difficult for everyone else. But they don't have the same strong will to succeed as you do. By the way, if you have the luxury of pondering where or not this is the right time to leave your day job, my advise is to stay where you are and just wonder out loud what could have been and should have been. It really takes a lot to succeed in a startup. Having any backup plan is the wrong place to start. Good luck.
By the way, if you are interested in learning more about the trials and tribulations of a startup, please take a look of my online book, http://www.StartupForLess.com.
--Denny--
--Denny--
Ok, we get the message: http://news.ycombinator.com/threads?id=gigamon
I wonder if "puneetht" got the message? I hope so.
--Denny--
--Denny--
It might give some investors cold feet. But I don't think startup founders should let the state of the economy be a deciding factor in what they do. It has much less effect on the outcome than how hard you work, or how carefully you hire, or how much attention you pay to the design of your site.
I'm not too worried. Weak dollar, rising oil prices and a credit crunch for mortgages isn't really going to affect the tech industry much. We're not a petroleum, credit or real estate based industry.
Rising oil prices mean that commodities that are distributed via oil based transport will be more expensive. Shipping widgets via plane train or truck just got more expensive. Our products are distributed electronically, so relatively speaking our products are going to be cheaper, and might be considered a better value.
Credit crunch and defaulting mortgages means that the banking and finance industries are going to be taking a bath for a bit. It's going to be harder for you to get a mortgage. I don't see that affecting the software biz much.
A weak dollar means that internationalization efforts will pay off. There are going to be more people in Europe, Canada and Asia that will be interested in buying American goods because American goods will be cheaper. It's time to make friends who know other languages to translate your site, and be sure that your programming language of choice has good Unicode support. Outsourcing just got more expensive, however because of the exchange rate differences.
Finally, that bottle of French champagne that you were going to drink at your liquidity party just got more expensive. That's a bummer. :)
Rising oil prices mean that commodities that are distributed via oil based transport will be more expensive. Shipping widgets via plane train or truck just got more expensive. Our products are distributed electronically, so relatively speaking our products are going to be cheaper, and might be considered a better value.
Credit crunch and defaulting mortgages means that the banking and finance industries are going to be taking a bath for a bit. It's going to be harder for you to get a mortgage. I don't see that affecting the software biz much.
A weak dollar means that internationalization efforts will pay off. There are going to be more people in Europe, Canada and Asia that will be interested in buying American goods because American goods will be cheaper. It's time to make friends who know other languages to translate your site, and be sure that your programming language of choice has good Unicode support. Outsourcing just got more expensive, however because of the exchange rate differences.
Finally, that bottle of French champagne that you were going to drink at your liquidity party just got more expensive. That's a bummer. :)
Weak dollar is a good thing if you're in the US and making a product or service that people abroad would buy. It's cheaper for them, hence they'll be more likely to buy and will buy more of it. On the other hand if you're in Europe, Australia, or even Canada and you plan to rely a lot on US sales then you may want to pick something different. Other than that I don't see anything significant to worry about.
The more people go on and on about how bad the economy is, the more they are self-selecting out of doing a startup. That's good for me.
Startups work or don't work based on how they relate to users. The "economy" is a huge average of all kinds of things. If you're making users happy, just keep your eye on the ball. All things being equal, I would rather run a startup in a hot market where all the other competitors were depressed than the same market swimming in investment cash.
Of course, there are lots of exceptions. This answer was just a generalization. YMMV. I'm sure somebody will reply with something pithy like "but if the town is on fire, should you really be trying to sell charcoal?" to which I reply, "if you have a product people want, it doesn't matter what the heck the rest of the town is doing"
Startups work or don't work based on how they relate to users. The "economy" is a huge average of all kinds of things. If you're making users happy, just keep your eye on the ball. All things being equal, I would rather run a startup in a hot market where all the other competitors were depressed than the same market swimming in investment cash.
Of course, there are lots of exceptions. This answer was just a generalization. YMMV. I'm sure somebody will reply with something pithy like "but if the town is on fire, should you really be trying to sell charcoal?" to which I reply, "if you have a product people want, it doesn't matter what the heck the rest of the town is doing"
heh. I think you're asking the wrong people man. We're a pretty optimistic bunch!
The US economy shouldn't effect you if you have something to sell to international consumers. Focus on internationalization and a weak US dollar can be good for your business.