I started all three of my businesses during downturns. Now I sit on dozens of advisory boards and run programs through which we advise hundreds of entrepreneurs who sometimes even pay me for my advice. So I guess I’ve got the street “cred” to write something on startups and downturns, although this won’t be one of those pieces on how a downturn is the best time to build a startup. There IS NO GOOD TIME to build a startup. It is always next to impossible, which is why such a large percentage of new businesses fail. But there are some observations I can make. Take them for what they are worth.
1. If you are doing a startup, you won’t even know you are in a downturn. I sure didn’t. I was so focused on my own day-to-day problems (averting starvation as a single mom) that I didn’t even notice the interest rates of 12-16% around me. No one was going to lend me money anyway, because I was a startup. So why would a downturn make a difference?
2. Downturns do, however, make you clever. In 1980, when I started my first business, secretaries were still commonplace and considered a necessity, but I couldn’t afford one. So I bought one of the earliest answering machines and one of the first personal computers (the Apple 2e). To disguise my poverty, I concocted an outgoing message that enjoined my callers to “trust the technology” to take a better message than a secretary. Ironically, this made me a thought leader.
3. Don’t hire. Hiring people only means laying them off later. Outsource, contract, partner, but don’t hire. It lays you open to so much grief: payroll processing, tax issues, HR issues. You don’t need to own the people.
4. Related lesson. Don’t rent space. Unless you are producing something, you don’t need it. There’s a structural change coming in the commercial real estate market as people realize during this downturn that the work can go to the people instead of the people coming to the work.
5. Forget funding. You won’t get it anyway, and you will waste a lot of time searching for it. In the mean time, your competitors will beat you to the window of opportunity.
6. If you happen to get an offer of funding, turn it down if you can. The terms will be Draconian, and you may easily get thrown out of your own company by the funding sources. This has happened to two or three entrepreneurial friends of mine.
7. Spend money on lawyers or use all the startup documents Y-Combinator has open-sourced for entrepreneurs.
Your partner may leave, die, change his mind, or embezzle. Your intellectual property may actually be worth something. Make sure you document relationships, entities, and IP going in.
8. On the other hand, don’t incur overhead before it’s time, so if you don’t truly have intellectual property, don’t throw away thousands trying to protect something no one wants or could replicate, or something not patentable. Ask a reputable intellectual property attorney.
9. Make somebody pay for your product or service immediately. This will tell you whether there’s a market. It may also tell you how and what to charge. You can even get a customer to fund the development of your product if you have something that is truly desirable. But this is where the rubber meets the road. If no one will pay, you may not have anything worthwhile. Only Twitter can afford to figure out its business model after the fact.
10. If your idea has too big a struggle getting traction, quit and change the model. Most good ideas get traction immediately, especially in this era of social media. Which doesn’t mean they break even. It just means someone besides you knows their value. There’s no real set time to allow your business to gestate before declaring it a failure, but you will know inside that it’s time to move on. You can move on by tweaking the business model, the price, the product, the concept, or the team. Do it. Don’t wait fifteen years to find out your market will NEVER support your service.
Starting a business is not for the faint of heart. On the other hand, after you have done it two or three times you know it’s just a matter of a good idea, some necessary pieces of paper, and some good people. You may notice that “upturn” or “downturn” don’t figure into this equation. And they shouldn’t.