When Is the Right Time to Start a Business? Now.

My favorite answer to a question VCs get every time they sit on panels was from Gordon Moore. "When is it a good time to start a company?" someone asked. Moore shook his head incredulously and answered, "When you have a good idea!"

getting funded badgeIf you look at the history of successful companies, they start up in good times and bad. Those started in poor economic times include Microsoft in 1975 and Lotus in 1982 and contemporaries such as LinkedIn in 2003 and Facebook in 2004. But you can just as easily find great companies that were started in good economic times. I can tell you that now definitely appears to be a great time to start a company. And the current economy is a big part of that reason.

Eighteen months ago I was seeing new companies at a pace I had never experienced. At First Round Capital we added 2,400 new companies to our database, companies we had an actual investment conversation with over the course of 2008. We found some great ones, but the hit rate was low. There were too many derivative ideas, FNACs ("feature, not a company"), and just plain bad ones. Usually these companies were founded by folks who were not ready to be entrepreneurs but thought starting a company was the cool thing to do. Our shorthand for these folks is now "employee #327 at Google," meaning that their first job was one where they had made money, had great success in their operating role, and figured, hey, if Larry and Sergey could do it why couldn't I?

Then Lehman happened, and the economy came crashing down. The effect on the community was astonishing. All the people that were starting companies because they saw their friends doing it decided that job at Google wasn't such a bad place to ride out the storm. And they disappeared from the market. The only ones left were the wild-eyed, optimistic nutballs who had amazing ideas and were crazy enough to make them work. Not surprisingly, many of these ideas involved attacking inefficiencies in businesses--they were very ROI-focused.

For us, that meant we invested in 18 new companies in 2008, an historic low. We are on pace to do much more business in 2009, though we're still actually meeting fewer companies than we did last year.

This is important, because it means less competition for employees, customers, user attention, and everything else you might need to get your company off the ground. Additionally, while the venture capital spigot is not as open as it was last year, the investment dollars out there are flowing disproportionately to the obviously great companies. Last year, a good company may have seen 1-2 term sheets and a company on the bubble would have seen one. Today the good companies are seeing 2-3 term sheets and the ones on the bubble aren't getting funded. For entrepreneurs, that's great news.

So if you have that burning urge to quit your stable job in this environment and start a company to build on that great idea, I can't think of why you wouldn't get started. Now.


rob hayesRob Hayes joined First Round Capital in 2006 and currently sits on the board of a number of companies including Mint.com, Xobni, and Get Satisfaction. Rob came to First Round Capital from Omidyar Network where he was their first venture investor. Prior to joining Omidyar, Rob was at Palm where he started their corporate venture fund.

Rob has an MBA from Columbia University and a B.A. in Political Economy from the University of California, Berkeley. You can keep up with his blog Permanent Record.


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8 Comments

  • Ivan Pantophlet

    I agree with this article 100%. My belief is that we are all misunderstanding what "career paths" really mean and what they are truly built for. When an employee goes through his or her career lives, they gain extremely valuable business knowledge and most don't even know it. Everytime your boss "shows you something" like a new software that businesses are using, or how to update content on the company website, etc., that knowledge can be used by the individual in the future to create a small business niche for themselves. And that is why I strongly believe that as business models change with the times, so must "career models". The average worker and especially top tier employees should consider leaving the nest of their company/employee relationships and start their own business roughly around the age 35. If they should unfortunately happen to fall into the layoff pit someday, the sting won't be as bad because of the added 2nd income from their business and with the time that they are now "un-employed" the individual may use more time to spend on their business to increase profits to the level of what they were getting paid to do at their former company. Thus, by means of what the average laid off employee would consider a "misfortune", financial freedom is achieved and lemons turned into sweet profitable lemonade, maybe even a lot sweeter than that old job.

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    Ivan B. Pantophlet
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  • Michael Durwin

    Obviously written by someone not actively trying to launch a company. As someone who IS actively trying to launch a startup, the environment sucks. VCs are acting like banks and Angel Investors are acting like VCs. IF you can launch without funding, great, provided you're selling something people are willing to purchase in lieu of paying their mortgage or going on vacation. If you need funding to get off the ground, forget it.

  • Chris Reich

    Just having a good idea is not enough, ever. Nor is having a passion. Nor a plan. None of those things will carry a new business from inception to success. I'd like a list of the companies Rob's firm has capitalized so I could see how many are still in business 5 years from now. I doubt the success rate would be better than the typical rate, perhaps worse because most people seeking start-up money believe the money is the key to success.

    Luck plays a major factor. Hard work --- harder than than most people imagine is another. Few employees make the conversion well. They are used to weekends off and lots of vacation time and getting a regular check. The start-up money always includes (in their plans) a livable income for a year.

    Finally, there is a talent to being able to make it on your own and very few have it. Those crawling to a VC for start-up money have the least or they would figure out an alternative to being handed the money to get started. I'd bet Rob would verify that most people seeking VC are ill-prepared and not worth his time.

    And, yes, the condition of the economy does matter. Now is not the ideal time to open a furniture store or an appliance business. But it might be a perfect time to offer personal assistant services on an hourly basis as companies reduce full-time head count.

    In other words, you can't make a 30 second answer of all business questions.

    How about that list, Rob?

    Chris Reich, TeachU.com

  • Shevonne

    I am planning on launching my freelance writing business in January. Everyone thinks I am crazy and should stay at my job, but I think the best time is now because people are more willing to outsource work than hire a full-time, salaried employee.

  • Jack Friedman

    I have a just started my company with a group of experienced individuals who lack funds yet have the never-ending desire to take risks and group together to find the necessary tools and resources associated with such a venture. I have found over the years that many people are shut down when attempting to turn an idea into reality, and accept rejection as there destiny. I simply take a 'no' as either lack of interest/knowledge or simply dealing with the wrong backers. Another problem is passion vs. probability in actually placing business before emotion. If an idea is not set in a foundation that makes sense (revenue), move on, have a plan b and c. In other words plan, prepare, execute. I do not believe that a bad economy has any less than opportunity in itself. America lacks skilled workers with so much technology taking over.

  • Aly-Khan Satchu

    A Bad Economy is counterintuitively not a bad time to start. If You have Your Ducks in a Row when Most Folk are losing their Heads and playing Defence, You are some way ahead of the curve.

    Aly-Khan Satchu
    www.rich.co.ke
    Twitter alykhansatchu

  • Rick Smith

    I started my company in a bad economy. The shape of the economy actually helped me out. People were willing to try new things, and they were frustrated (which led to them telling me WHY there were frustrated, and helping me shape my business).

    I also started the business with no money, which i have blogged about.

    Rick Smith
    The Leap