Ask YC: Is there a recession/depression coming?

https://news.ycombinator.com/item?id=88296

by CarpeDiem • 19 years ago

28 45 19 years ago

news.ycombinator.com

The economy seems to be heading to a recession, but how will this affect the internet startup world? I ask because I am planning on quitting my job with the federal government to start my own startup in January. And no, I can't keep the job and do the startup, I've been trying for 8 months to do that. Is venture capital going to dry up? How about online advertising revenue? Should I wait until the recession is over?

dpapathanasiou• 19 years ago

SAI has a "Recession Watch Timeline" you might be interested in: http://www.alleyinsider.com/2007/12/recession-watch-morgan-s...

shayan3• 19 years ago

I would say recession is kind of here, and coming (but def not depression, technically speaking the economy is going through depression, when it has been in recession for a couple of years and not coming out). but in terms of should you wait for it to go away, I really don't think so. If you have an idea then you should def implement it now, otherwise it will be too late for it. But you have to realize that if in case there will be a recession, then finding jobs might not be as easy either. So if you don't think you can live and sustain the startup life for a while, then you should be careful quiting your job.

Also, there is a lot of talks of online advertising revenues going down, and this might even damage companies like Google a lot. But if you feel like you have a product that would attract many eye balls then you should implement it without worrying too much about online ads, and also you might be able to either find a business model for it that doesn't solely depend on ads or find other interesting exit options for yourself,.

In terms of venture capital, it all depends on how much money your project needs. As many of the "web 2.0" companies don't require much capital to start, I wouldn't think it will dry up, but if more and more of them fail to eventually generate revenue, I would assume the VCs will get more selective. But since the capital needed is much smaller than the dot-com era I would hardly think that vc's will dry up. Of course that is IMHO.

nickb• 19 years ago

I'd say we're very close to recession. Even Morgan Stanley says we're gonna enter recession soon:

http://www.telegraph.co.uk/money/main.jhtml?view=DETAILS&...

whacked_new3• 19 years ago

Expletive deity, just this report? That triggered the 2+% drop in the last 2 hours!??!?

ctkrohn4• 19 years ago

No. The Dow's large drop today was triggered by the Fed cutting the fed funds target rate by 25 basis points (0.25%). Stock market investors were hoping that the Fed would cut 50 basis points, giving a further kick to the economy. However, cutting interest rates by too much at one time can make money too easy, adding to inflation pressures.

I work on a trading floor at a major investment bank, and no one near me mentioned the Morgan Stanley report. My firm has been forecasting a 33% chance of a recession.

joeguilmette• 19 years ago

What do you think is going to happen when the dollar crashes, oil costs US$200/barrel, and we can't borrow money from the Chinese (or anyone) anymore?

I, for one, am buying a bike while the steel is still exchangeable for all that green paper I have lying around.

Tichy• 19 years ago

less driving -> more internet usage

mrtron• 19 years ago

I have had that feeling for about a year that there will be a pretty sizeable downturn coming, and it will probably last a fair while.

But only time will tell, there are a lot of factors, it could be delayed with interest rate cuts or forcing the teaser rate givers to honor those rates for a longer period of time, etc.

run4yourlives• 19 years ago

It's really irrelevant from your p.o.v. when you really think it through.

All a recession does is trim the excess baggage from the economy. Companies that aren't the most efficient, and from the startup world, the concepts that aren't the most profitable or capable have difficulty. The rest make a little less, but get by.

IMO it's the best time to start something, since you'll be thinking "worst case" right off the bat. This should help your decision making. You'll naturally want to risk less and will be more deliberate with the directions you follow. You'll have a stronger, more efficient organization than you would if you started during a boom time.

Then, as the economy brightens and you emerge, it'll be gravy train time!

fauigerzigerk• 19 years ago

That sounds logical but unfortunately it's not that simple. In 2001 I was part of a telecom related startup. All of the telcos were severely affected by the downturn, not just the bad ones. After the bubble burst nobody would do any deals that didn't have a positive effect on the balance sheet within that same quarter. So, effectively, they just stopped to launch new services. They all just stopped at the same time. Period. End of story.

So my advice to CarpeDiem is this: In a recession even more than at other times, don't depend on big deals you have to close in order to survive. Lots of small customers that value your product and pay real money is what you want in that situation (and probably in any situation). I wouldn't rely ad revenue either because it's notoriously volatile in recessions.

Ah yes, before I forget (although I'd rather like to forget that) we did actually have venture capital funding, but the VC went bankrupt before the second (already agreed) round of funding went through. And that VC was a subsidiary of a major corporation, an icon of stability, not reliant on the tech or telecoms sector, but it still went bust :-)

skmurphy• 19 years ago

A recession is the best time to start a firm. Most companies make more mistakes and develop more bad habits when times are easy than when times are tough. It may take tough times to uncover the bad habits you developed and the unrealistic assumptions that you made when times were good, but it's the bad habits that are responsible, not tough times.

Focus on customers and revenue and a value proposition that's compelling even when times are tough. Sooner or later your startup will face tough economic times, sooner is better.

jwecker• 19 years ago

I agree. As the 37 Signals people say- Embrace Your Constraints.

webwright• 19 years ago

This is a great point, IMO. I'd add to it that, if you have a choice, SOLVE A PROBLEM. A recession is certainly a good time to solve a business problem (save your customers time/money) but may not be as good a time for an ad-supported social "fun" site.

Either way, keep it lean (in terms of investment and burn rate).

nostrademons2• 19 years ago

Recessions are good times to for social "fun" sites too - HotOrNot, Blogger, LiveJournal, PlentyOfFish, Flickr, and Friendster were all started either right before or during the 01-02 recession, and Disney got its start in the middle of the Great Depression. You just gotta keep your cash outlays less than expenses, find a revenue stream other than advertising, and build something attractive enough that at least some people are willing to pay for it.

yawl• 19 years ago

If you ask 100 people and you will get 100 opnions. There is definately a chance for recession, but it is hard to judge the scale and do the timing right.

whacked_new3• 19 years ago

I'm not educated about this, but I'm guessing that recession means less mobility and smaller spendings. Perhaps a good project would help people save money or make wiser purchases. Perhaps Netflix will eat everybody up (although I don't know much about it). Perhaps services that facilitate something between people who are physically in proximity, like Craigslist, will eat everybody up.

I generally agree with shayan... and I don't think this is something you can just wait until it's "over" -- it won't just come and go like one of those cartoony storm clouds. The other thing of concern is, suppose China sustains hyper growth during the recession. Your competition is now over there, and they won't wait. What a dilemma.

I hope pg replies to your question; would love to see his answer.

CarpeDiem2• 19 years ago

Wow, thanks for all the comments!

@nickb: That Morgan Stanley report is what prompted this post. I think it is prudent to question the source, however.

@shayan: My team and I have 6 months of savings, meaning we can pay the bills for 6 months before we either need income or investment. Do you think that is long enough?

@skmurphy: This makes a lot of sense to me, there are a few anecdotal stories about 2002-2003 being a great time to have started a company. And theres that report that ~50% of pre-1999 companies are still around. Good point.

After thinking about it some more I came to several comclusions: 1. I am very unhappy at my current job. I'm young intelligent (or so I think), hard working, and I have big dreams. I am capable of doing much more with my life than this job.

2. If my startup fails, I can blame it on the economy.

3. Maybe it is a bad time, and maybe it is a mistake to start a company right now. But its a bigger mistake, even a tradgedy to be afraid of the unknown. I won't let my life be run by fear.

I'll keep the YC crowd posted about our progress ;-)

shayan3• 19 years ago

Since I have no idea what your product is, how big your team is, how much experience you have and what resources you have access to, it is hard to say how much saving is good and how much time you can spend with it (since the costs are also unkonwn).

But I would say in general you would spend about 6 months developing your product, and having something ready anywhere from a good working alpha version to something more of a working prototype and work in progress. I hardly doubt there are too many companies that can start generating revenues (let alone profits to spend on living expenses) within six months from the day they start.

So I would say the best way to do this is to start working on the idea before you quit your job, try to get a prototype or something together, and start looking for funding. I think in your case at the end of six months you will def need outside money (again since I doubt you'll be generating revenues by then and you are out of savings).

So regardless, if you do quit, I would recommend you looking for money right away. The worst thing to ever do is to ask for money when you need it, and when you are under pressure. Take your time, do your shopping, find out how interested people are in your product and try to raise some smart money before your time is up.

and please do keep us in the loop, and good luck to you

CarpeDiem2• 19 years ago

We already have a feature complete beta, we've been working on it for 8 months while keeping the day jobs. Most of the remaining work to do before we launch is superficial, just refining the UI and "making it pretty". We have been actively seeking money, but have gotten blank stares from investors when we explain that we have kept our day jobs thus far. So, I think I am agreeing with what you're saying, thanks for the input!

kmt• 19 years ago

Email me at the address in my profile.

ocamlback5• 19 years ago

"@shayan: My team and I have 6 months of savings, meaning we can pay the bills for 6 months before we either need income or investment. Do you think that is long enough?"

I'm not @shayan, but I'll put in my 2cents: no. It's not enough. Given the current economic conditions and the realities of startups you should have more like 18 to 24 months worth of expenses saved up. Because: 1) you don't want to have to go hat in hand to VC at a very vulnerable time and 2) you don't want to have to go back to work in the middle of your development cycle because you ran out of money.

Yes, you may think it'll only take six months till you get some cashflow, but it'll likely take longer than that.

Now is as good a time as any to do a startup, but do make sure you're adequately capitalized.

pg• 19 years ago

It doesn't matter. First of all, it is notoriously impossible for anyone except a few pros (if even them) to time the market. So don't even bother trying. Just live your life.

But second, even if you were sure that a recession was coming, you shouldn't let it affect your plans for starting a startup. Yes, funding does tend to dry up somewhat when the economy is bad. But if you look at startups that succeed vs. those that fail, the quality of what they built has much more effect on the final outcome than the state of the economy when they were getting started.

So this is yet another case of founders worrying about the wrong things. Recessions don't kill startups. Making mediocre stuff kills startups.

mattmaroon• 19 years ago

Unless maybe your startup is called stufftodowhentheeconomyisnotinarecession.com.

brlewis• 19 years ago

Uh oh. I'm toast.

npotter• 19 years ago

I agree with everyone about not waiting to start, but there are ways in which you may have to adjust your business model to account for a global lack of credit, especially when US consumers are so dependent on credit for spending. I think the value of internet ads is going to drop substantially over the next few years as a result of much more sluggish consumer spending.

To me it just means the same thing that you hear all over: make a good product that has tangible value, and people will pay you to use it.

lowfat• 19 years ago

Just make sure you have enough savings to let you focus your efforts on your startup - maybe 6 months worth of expenses - so that recession or not, you will be okay.

ocamlback5• 19 years ago

6 months is fine in normal circumstances, but if you're going to quit a very safe job and start a company of your own you probably want to have a good deal more than six months worth of expenses on hand - probably more like 2 years given the current economic outlook.

Thing is, it's gonna take several months to develop the product (probably code in this case) and then you have to try to market it and find paying customers - that takes time. And then customers might want additional features and changes. More time. When it's all said and done it's likely to take a lot longer than six months to get to the point where there is some cash coming in. You don't want to be in a situation where you just exhausted your six months cash and now you have to go back to work in the middle of your product development cycle. Give yourself some breathing room and have 18 to 24 months expenses on hand.

optimal• 19 years ago

The tide goes out, then comes back in. Those not on the margins should be fine.

Carpe, are you sure you don't want to keep your govjob while working on the startup?

russ• 19 years ago

Ironically, your username is carpe diem!

patrickg-zill• 19 years ago

Just a note, recession strictly defined means 2 quarters of decline. If there is 1 quarter of decline, then 1 of gain, then another of decline, there is no recession.

My question about your startup would be along the lines of how you are getting paid - are you depending on online advertising, or is this a service you are going to sell someone? Is there any chance you can have 1 or 2 customers ready to pay you something, even a token amount, while it is in "late-alpha" stage?

ocamlback5• 19 years ago

"Just a note, recession strictly defined means 2 quarters of decline. If there is 1 quarter of decline, then 1 of gain, then another of decline, there is no recession."

True, but long periods of sluggish growth can be worse than a relatively short recession. Better to get the pain over with quickly than to spread it out over a long period - just ask someone from Japan about the 1990 to ~2004 period of very sluggish growth there. I'd much prefer a 1 or 2 year severe recession than a 14 year epoch of sluggish growth (and it can oscillate as you mention, going from positive GDP to negative and back again and still not be classified as a recession)

Hexayurt• 19 years ago

Yes, of course a recession/depression is coming.

However, it's possible that the implications of Nanosolar being about to cut the price of grid electricity by 80% will bring us out of it middle of next year.

jdavid• 19 years ago

1. VC funds are already committed, so that is one point. 2. people are easier to hire in a down turn, so its cheaper.

If you are a start up that will help businesses save money, or reduce fiscal risk, a down turn is good for your business.

ctkrohn4• 19 years ago

A recession could potentially benefit startups by making venture capital more attractive than traditional investments. During a recession, you expect the Fed to lower interest rates, making traditional bonds less attractive. Stocks won't be very appealing either, since they tend to slide 20-30% in a recession. The once-enormous market for exotic structured investments (e.g. CDOs, ABS, SIVs, CMOs, whatever) has nearly dried up.

People will need somewhere to put their money. Some will turn to hedge funds and private equity. Others will turn to distressed debt funds, seeking to pick up the pieces of the recession. I'm sure plenty of people will turn to venture capital as well.

EDIT: That being said, I don't think it matters all that much whether or not we see a recession. Economic growth certainly isn't going to be great over the next year or so, but does it really matter if the GDP changes by +1% or -1%? All that's needed for a recession is two consecutive quarters of negative GDP growth. I think this is quite likely, but I doubt we will see real pain. Recent economic stats have been holding up despite the pressure from housing. Inflation remains moderate in the high 2% range. The Paulsen subprime rate freeze should help reduce foreclosures and slow house price depreciation. We'll see how it goes.

bootload• 19 years ago

"... The economy seems to be heading to a recession, but how will this affect the internet startup world? ..."

I remember reading somewhere on the Internet that one way to solve problems was to "redefine" them. [0] So try thinking "reasons you should start a startup". I can think of a few straight off.

- the coder pool is going to increase as businesses close or lay off extra staff.

- rents on property are going to be cheaper

- consumers are probably going to tighten the strings and shun payment to services of dubious value

- as opportunities, credit dries up, creators are really going to have to re-evaluate "what users want", now. Not pre-crash or recession.

- now you have to be frugal out of necessity :)

The advantage here is the rules of the game change. And change quickly. Where there is change there is opportunity as yesterdays "new ideas" become mainstream and relegated to the history of technology. Thats one theory. The other is in the hiatus the chance to build new technology and ideas has some breathing room to grow.

I'd also like you to consider the "future effect" of the current boom. A backlash is coming for those working in "safe, secure jobs" where market demand wane. I found this in the Australian press [1] and read as follows:

"... Michael Warrilow, Managing director of IT advisory company Hydrasight, believes today's tight labour market may be creating resentment among employers who have made pool-playing, T-Shirt wearing and all-day-Facebooking a part of the work 2.0 experience ..." [2]

and then continues ...

"... Generation Y will be appeased for as long as we continue with low unenployment... Once employers have more choice, there will be a backlash against their behaviour. " [3]

I can think of no better time to start a startup and it gives you a new reason to say to your folks, "At least it's not selling real-estate".

[0] Ideas for Startups: Wealth, 12 paras down ~ http://www.paulgraham.com/ideas.html

[1] A more conservative market to the US. But I have no doubt that VC's are also sharpening their knives.

[2], [3] Simon Sharwood ~ http://www.theage.com.au/news/technology/fast-forward-to-08/...

ocamlback5• 19 years ago

Recession - yep, in fact we're probably in one already. Too much wealth is being destroyed in this mortgage crunch/housing decline. Depression, though? Not likely - though I have heard very well connected folks say that we're probalby at the greatest risk of a depression since the 30's. Still, that risk is probably something less than 5%.

However, it's quite possible that this will be a rather deep recession - probably the deepest since the 1980 - 1982 recession. I was in college then. It was very difficult to find work of any kind.

The question on the table is should you leave your likely very safe government job to do this startup. I'll guess this is a software startup of some sort, and that your main expense is living expenses as you develop the code. That being the case, you should probably have at least 2 years worth of living expenses in the bank prior to doing this. A credit-crunch recession such as the one shaping up now means that it's going to be very difficult to borrow money. So do plan to self-fund as much as possible right now. Also, who are your target customers? Will they have trouble coming up with the money to pay you if we get a serious recession? - this is something you should think about.

If you don't have enough money on hand to be able to live for a couple of years, then I'd probably caution you to wait until you do have that much saved up. In the meantime, while you continue to work and save you'll have time to find out if this is just going to be a mild recession or something much more serious.

Ask YC: Is there a recession/depression coming?

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