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!”
If 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 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.