Sometimes starting a business in tough economic times does make sense

In writing this post, I have to admit that I am highly biased, highly idealistic, and naive, because I have not started a business before my current endeavors, especially during one of the toughest economic times our country has faced in quite some time. I have a tendency to drink my own kool-aid, but I wanted to give my two cents on the matter. When talking about starting a business, I am referring to a high growth business, not necessairly a lifestyle business.

Every day, reading about the implosion of our national economic system can be depressing. Another day, another bank folding, another one being acquired for pennies on the dollar. This credit crunch is in the minds of all Americans, whether you like it or not, especially in my small subset of family, friends, and associates which is probably not representative of America at large.

I came from the financial sector, working at a bank, that is now the one buying these financial institutions at firesale prices. Being a start-up entrepreneur myself, there is so much talk with other entrepreneurs about the implications of trying to make it, when institutional money may be hard to come by and potential customers are keeping their cash in their wallets. In addition to being a homeowner, I realized that I probably paid too much for my piece of property, buying during the boom times, which coincided with me finally having some money in my pocket. Because of the home buying experience, I think I have learned quite a bit about when you should be buying, when you should be selling, and when you should be building. To me, it’s contrary of what I’ve always understood. Mark Cuban said it best in his latest blog post,

“The nature of our country’s business infrastructure is that it is destined to be boom and bust. Booms are when the smart people sell. Busts are when rich people started on their path to wealth.”

With that being said, I think this is a great time to start a high-growth, high opportunity Internet start-up because:

• When money is tight, it forces you to establish a solid business model
• Would be competitors, especially those who need a great salary, benefits, and stability are going to take a wait-and-see approach, probably not leaving their corporate jobs
• Your potential competitors aren’t getting funded, especially copycat ideas
• The pace of development and innovation is slowed, enabling you to incrementally iterate, without worrying that too much money is flowing into your space, possibly crushing you or diluting your impact on the space
• Real estate prices will go down, as well as labor input costs
• Only those truly passionate about what they are doing and the value they are creating are going to stay in the game. Others, who may only be monetairly motivated, will drop out and do something “safer”

I think the last point is the most important one coupled with Mark Cuban’s quote from above. Starting a business during these times isn’t for the faint of heart. It’s not easy. Everyone has more reasons for saying why your idea won’t work and that nobody is going to give you money to fund it. You see some of your favorite watering holes dry up, close up shop, and everyone around you is talking about the gloom and doom. To me, there is no greater time to start a high-growth business, than a time where you can tinker and refine your product, and be best in class by the time the economy starts humming again.

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Starting a business during the boom times with everyone else is just as irrational as me buying my condo at the same time everyone else is. If I would have waited a couple more years and let the legs fall from under the market, I would have been able to have my choice of the land. As Techcrunch writes, The Seeds of the Next Big Thing Are Being Planted Now. Not to say whether I have definitely created a big thing, but if you have the stomach for it, I don’t see a better time in history to start a business. For every YouTube, there are several companies that took 3-5 years to build, created value during the down economic times, and when the economy started cranking again, they were among the first to sell. For all the fellow entrepreneurs, keep plugging away at your start-up (except if you are in my space), and if you can ride out the next two years, you’ll be surprised how well you’re positioned when everyone is looking for strategic acquisitions.

Update (10-8-08): Brad Feld has an inspirational post highlighting many of the points that I mention in my post. He points to the fact that some of the best companies he’s been involved in, were created between 2000-2002.

Update (10-11-08): Brian Solis has a positive spin on this on Techcrunch here.

Update (10-15-08): Great post by the Newscred crew.