tech

Is now a good time to start a company?

Back in 2006, my co-founder at Hunch, Caterina Fake, wrote a blog post called “It’s a bad time to start a company.”  There were no doubt some great consumer internet companies started then (note she was only talking about consumer internet – which is what I’m also talking about), but on average I’m guessing she was probably right.

Now I’m sure Caterina would agree with me that if you want to start a company, you should just go do it immediately, as she herself has done repeatedly, so no one is trying to discourage entrepreneurs.   But the reality is the fate of your company is partially dependent on things you can’t control, including what is happening in the tech market as a whole, which tends to be extremely cyclical.

One way to look at this is from the venture capital side.  VC returns are extremely cyclical.  For example, 1996 funds (or “vintages” as VCs say) returned an average of 95% while 1999 funds returned an average of -3%.  I don’t think this decade had such extreme swings but most people agree 2002-2005 were great times to invest in consumer internet and afterwards probably not as great.

Venture returns are a function of two things:  great opportunities and low valuations.  Low valuations are obviously not good for entrepreneurs from a dilution perspective but they do indicate that investors are fearful, which means we are probably at the down part of the business cycle, which has historically been a great time to start a company.

People are fearful now, and people with a shallow understanding of technology are declaring the internet over.  I’ve been saying for years that the best time to start a company and invest in startups will be when people start declaring Google (and online advertising in general) a “mature” business, which seems to be happening now.  It feels a little like 2003 when people mocked “dot coms” as profitless sock puppets.   In retrospect, 2003 was a great time to start a company.

On the other hand, there were massive amounts of money invested in consumer internet startups over the last few years.  You know when hedge funds and mutual funds start investing in early stage startups, as they were in 2007-8, we’ve reached the peak of the cycle.  It takes a long time for that kind of money to work itself out of the system, so at least for another year or two you are still going to see some crazy money being spent on marketing, salaries etc, making it harder for us mortals to compete.

All that said, I wouldn’t try to over think timing.  It’s pretty much impossible to predict what will happen in the near term.  You should instead focus on solving a big problem and let the chips fall where they may.  Be cautious about falling into starting something around the latest fad, e.g. online video, facebook apps, twitter apps.  I love the audaciousness behind this Andy Grove interview:

What really infuriates him is the concept of the “exit strategy.” That’s when leaders of startup companies make plans to sell out to the highest bidder rather than trying to build important companies over a long period. “Intel never had an exit strategy,” he tells me. “These days, people cobble something together. No capital. No technology. They measure eyeballs and sell advertising. Then they get rid of it. You can’t build an empire out of this kind of concoction. You don’t even try.”

What really infuriates him is the concept of the “exit strategy.” That’s when leaders of startup companies make plans to sell out to the highest bidder rather than trying to build important companies over a long period. “Intel never had an exit strategy,” he tells me. “These days, people cobble something together. No capital. No technology. They measure eyeballs and sell advertising. Then they get rid of it. You can’t build an empire out of this kind of concoction. You don’t even try.”

Benjamin Graham famously said that the stock market is a voting machine in the short run and weighing machine in the long run.  The same is true of startups.  Make something weighty – try to build an empire – and you’ll be far less vulnerable to the ups and downs of the market.

Categories: tech

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