My previous blog post got me thinking about when is the best time to start a company, in terms of when is the best time to start a company that will survive. Is the probability of success higher for companies founded during good times and lower during poor economic times? In thinking about this, inherent in the quotation above “tough time to be at a new startup” is the notion that starting a company in a good time will give you a greater probability of survival.
I only look back to the dot com boom which occurred during a strong economic expansionary period and see that this statement can be turned on its head – if you look statistically at the survival rate of companies that were started in the hey-day boom times of 1998-2000, the failure rate was extremely high, and the losses were spectacular. During these boom times, one can make the case that companies started during good times may be more prone to failure due to the following factors:
- Easy access to capital for unvetted business plans and continued funding of weak ideas
- Strong competition from copycats and other competitors
- Poor management of critical business drivers and lax oversight of costs
- Delayed recognition of poor performance due to a rising tide boosting all ships
- Audience first, monetisation later (or even never) strategy
- Exit by acquisition a higher likelihood
Conversely, companies like ours started in this tougher time have to deal with these factors:
- Tighter funding markets making those projects that do get funding the ones who have the strongest ideas and teams
- Lower competition from existing and new players
- Greater management attention to costs and performance indicators
- Stronger oversight from investors regarding strategy and performance
- The need to execute on a business model that drives cashflow and achieves break even as soon as possible
- The necessity to create a business that can stand on its own two legs for the foreseeable future given the lower likelihood of a white knight coming in to acquire the company
Techcrunch has written an interesting article about how a down time can be an opportunity for startups, and I have to agree wholeheartedly:
This is your time to vault in front of your competition, to earn rapid and sweeping visibility, for a fraction of the time and money that was required to excel during the “good days.” Your rivals are retreating right now, so what are you going to do about it?
The last thing I want to say is that I was watching the leWeb Panel video “Money Talks: Getting Financed in a Recession” and something Eric Archambeau (General Partner, Wellington Partners ) said really made me take notice. In looking at 25 years of startup company data from 1980, there is almost an equal probability of being a successful company no matter what year you were founded – regardless of the cycle, regardless of whether its a recession or a great year, the probability of success was uncorrelated with the year in which you were founded (I wonder if that was the case for companies started in 1998-2000, as per my discussion above). Eric says that the implications for a VC are to not stop investing in a down cycle and that you will have an equal probability of spawning a successful company in a down market. Nice. Other panelists included Fred Wilson and Martin Varsavsky.
- (24th minute is where you want to forward to…the remainder involves important VCs telling us how much they enjoy saying “Non” to French entrepreneurs
Forward to the 24 minute mark for this illuminating piece of information!
See my recent blog post from Seth Godin that also addresses this topic:
http://busterblog.wordpress.com/2009/07/21/great-advice-from-seth-godin-how-to-approach-challenges-with-the-correct-mindset/
