Starting a business in a recession

Having recently started a business in one of the worst economies in several generations, I am often reminded that many great companies launched in tough times. Microsoft, Apple, etc. - you have probably heard the list as well. And now that I am knee deep in my latest start-up, I wholeheartedly agree there is no better time to start a company. Here's why:

1. Self vetting - If you can raise capital and get clients in a bad market, the idea/product/team must be pretty good.

2. Bad economies accelerate disruption - typically, if an old model business was declining during good times because the trend was towards a new way of operating that business (think newspapers, radio, etc.), the combination of the cyclical decline (from the bad economy) and the organic decline (from new competition) will hit those businesses particularly hard - and force many of them to fail. This creates more opportunity for the disruptors.

3. Real Estate - its much easier to get offices and or industrial space in a down economy. This is obvious, but it also gets you things like a better location (marketing), desks (lower cap ex), and a nice build out that works for the type of business you have - which means greater long term efficiency for your company. In addition to the lower rents, business owners are often more focused on getting a better deal in a down economy - so the impact is amplified.

4. Government - even though banks tend to pull back in down markets, often the government steps up. Yesterday I heard of 2 start-ups getting significant capital from the government for their projects. And this money doesn't have a 4x liquidation preference...

5. People - This is probably the most important factor. Good people are easier to find in a down economy. They often are less attached to their prior business because a) their stock options are not worth as much; b) their current job is less fun because business isn't as good as it once was; c) they are worried about getting fired; or d) they were fired. Great people want to be in an exciting, dynamic environment where what they do matters, and where the upside potential is huge. And when the alternative is misery or worse, it's much easier to attract strong talent.

6. Valuations - This one is somewhat counter intuitive, but after talking to a bunch of entrepreneurs over the past few months - as well as from my own experience - I believe that starting with a sane valuation is crucial to the success of your business. In boom years, valuations are high, and due to the cyclical nature of business, the odds are good that your next round (or the one after that) will be in a bad economy, and the economy will have a negative impact on your business. When that happens, it doesn't just mean more dilution. It can often wipe out a management team - or at least significantly decrease their equity. While not all teams are motivated by their equity and upside - and not all boards react negatively to a business that is impacted by a negative economy - many do. When this happens, board meetings get ugly and teams often fall apart. Sometimes companies get through this - and sometimes they don't. And when valuations are too high, it usually means more capital is raised than is needed - which often has the impact of creating a less capital efficient culture of spending. And that is a hard to change down the road. Having fair valuations at each round helps mitigate these problems - and down economies seem to favor fair "A" round valuations.