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.

http://ouriel.typepad.com OurielOhayon

I believe that the best time to start a company is when you really feel like it. I mean when you wake up every single morning with the obsession of achieving something specific. There will be always a good and bad external set of reasons for any period in time to start a company.

So what the hell? just do it. honestly no one really knows what a good period is. I personally can't figure it out yet.

cdixon

Agree. If you aren't obsessed at the beginning, you almost certainly won't make it through the long haul.

Raj

From a market perspective, there are 2 points that matter for a startup:
1. When you are fund-raising: If you happen to be in a bad market, funding raising would be tougher and deal terms (including valuations) may be less favorable. However, this is not as important as the 2nd point.
2. When you exit (including going IPO to some extent): Exiting in a hot market is far more valuable than exiting in a poor market when it's a buyers' market and risk-appetite for acquisitions is lower. To that end, exiting during 98-99 or 2006-early 2008 was the best thing you could do.

http://reecepacheco.com reecepacheco

Haha… My co-founder @Spinosa got engaged, quit his job at Cisco and started full time with our startup – all within two months. No time better than the present, huh?

The term “empire” is a great one. We refer to our market as the “bigger ecosystem,” because there are multiple players, transaction points and systems at play. I may borrow “empire” from you though, because that's what we plan to build – a lasting business, dominant in the food chain.

You say that the peak of the cycle was '07-08, so do you think we're still in decline, or have we hit the nadir yet? Further, I don't think it's terrible to start with a lower valuation early on – doesn't that leave room to better build up your valuation as the economy recovers?

Finally, it's the entrepreneurs who want to build “empires” who are going to lead the way in turning the cycle, and they'll do this regardless of the current conditions. We're raising capital right now – bad timing – but we know we're going to be successful anyway.

I once heard Santo Politi (Spark Capital) say (something to the effect of) “the best entrepreneurs are such a force of nature that they are going to get it done no matter what.” Brings us back to the ecosystem, and being the force of nature within it.

cdixon

No idea if we hit the nadir. I hope so. All depends on what happens next, which I don't know.

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http://www.twitter.com/stevenkane Steven Kane

as a rule, I agree with you — every time is a good time to start a new business, if thats where your heart and your head are at

and i totally agree startup founders need to think longterm — they are very likely to toil at their “newco” for 5-10 years, almost never a quick results type endeavor or commitment.

but andy grove's quote (which is dragged out so often is getting threadbare) is 100% self-serving (for Grove) bullshit: intel had an exit strategy — they did a public offering in 1971 — only three years after the company was founded!

cdixon

grove – come on, you gotta give the guy some props. he really did create an empire. i also don't think by “exit” he meant liquidity. He meant the “built to flip” startups and I think his point is far.

http://www.twitter.com/stevenkane Steven Kane

i give mr grove props 24/7. what a brilliant ballsy heroic success story!

but that doesn't mean i don't think he's sometimes guilty of selective memory, at best, and pomposity and self-aggrandizement at worst

and that quyote ranks with the worst

and it doesn't matter what we think he “meant” — actually we have no idea

all we can judge is what he actually said. which you quoted

and which *is* baloney — intel *did* have an exit strategy. and intel's investors got an exit. after only three years, through share sales to public market buyers (versus share sales in an M&A scenario.)

for me, thats a distinction without a difference

also, chris — how many VC's consider an IPO an exit strategy?

i humbly submit: they *all* do.

thing is, i love all the openness and counsel to young entrepreneurs and startups on the blogosphere (wish it was around when i needed it, back ion the jurassic er!)

and you, chris, are amongst the best of the best

but i don't understand why one can't ask for a little less giddy euphoria and blowing of VC-investor-oriented sunshine up people's rear ends?

telling entrepreneurs to look always to the stars is not uniformly good advice.

thats just the truth.

it may make sense from a VCs point of view– VCs, after all, manage large portfolios of diversified startup investments, and over long periods of time, and can only justify their humungous fees by promising humungous returns, which are in turn only available if startups only swing for grand slam home runs. ok.

but founders and entrepreneurs do not manage portfolios of diversified risks.

no, they lash themselves to the wheel of one, and only one, highly risky endeavor, for low low “subsistence” pay, and for a long period of time. so there is nothing nothing nothing wrong with focusing on exit strategies.

in fact, its the only sane and rational thing to do.

my $0.02

cdixon

I have nothing wrong with entrepreneurs who want to create smaller (non-empire) businesses. I would just say that as a strategy, building to flip is very dangerous and basically puts your fate mostly in the hands of market whims.

Also, from a broader, societal perspective, I like it when VCs/entrepreneurs make big bold bets. A new search engine, electric car, etc. And this stuff requires capital.

http://www.twitter.com/stevenkane Steven Kane

fair enough

i might quibble with your definition of “flip”. *every* VC investment is designed to flip. no VC investment is meant to be held for the true long term.

and in my previous comment i said founders need to recognize they are signing up for 5-10 year endeavors. *not* for quick results

finally, i too respect and admire “big bold bets.” i just worry that its too simplistic to view “big bold bets” as only massive technology projects

Newman's Own and Ben & Jerry's were “big bold bets” – that consumers wanted their same old same old products, but in a more authentic artisanal organic way

Zappo's was a big bold bet that consumers would buy shoes online (previously shoes were considered not right for ecommerce as people needed to try them on)

Agamatrix is/was a big bold bet (and is a big bold success) that a small incremental improvement in the algorithm used by blood glucose monitors to test blood would massively improve peoples lives

Twitter is/was a big bold bet on consumer demand for a simple communications utility. No rocket science there, just brilliant simple concept and solid continuing brilliant execution

etc

cdixon

Good point – it doesn't have to be a technology bet to be big and bold.

http://caterpillarcowboy.com dlifson

I was a student in Cornell's Computer Science program from 2001 – 2005, and I remember hearing the administration commenting on the drastic decline of CS undergrads after the dot-com crash. Unfortunately, many people simply are out to try and make a quick buck, and make all sorts of short-term optimizations to get there.

One of my favorite Jeff Bezos sayings is “After you plant a seed, you don't dig it up every day to see how it's doing.” (He also loves to mention the voting vs. weighing machine metaphor and “You're not 20% smarter when the stock goes up 20%, just like you're not 20% dumber when it goes down 20%.”) Real investments built on strong fundamentals are long term investments. In Jeff's mind, that's a minimum of 7 years.

Seven years is a long time, and I think some entrepreneurs feel pressure to flip and get rich quick because that's what happened in the late 90s and that's what VCs want. Conversely, consider the condemnation on those whose companies get labelled as “lifestyle businesses”. Thankfully, the idea of becoming cash flow positive first and scaling later is starting to become more accepted, a trend I hope continues.
http://www.owocki.com/ Kevin Owocki

Agree with @OurielOhayon. The best time to start a company is when you have an idea and are completely obsessed with it. Trying to time the market is a losing game.

Raj

Yes, but within reason.

http://giffconstable.com giffc

Speaking in generalizations, I agree with you. In downturns it is much harder to raise money, and often harder to find partners for a bootstrap, but that applies to potential competitors as well. If you can pull a team together, it can really be beneficial launching a product at the beginning of an upturn and riding a positive wave.
http://www.owocki.com/ Kevin Owocki

Agree with @OurielOhayon. The best time to start a company is when you have an idea and are completely obsessed with it. Trying to time the market is a losing game.
http://giffconstable.com giffc

Speaking in generalizations, I agree with you. In downturns it is much harder to raise money, and often harder to find partners for a bootstrap, but that applies to potential competitors as well. If you can pull a team together, it can really be beneficial launching a product at the beginning of an upturn and riding a positive wave.
Raj

From a market perspective, there are 2 points that matter for a startup:
1. When you are fund-raising: If you happen to be in a bad market, funding raising would be tougher and deal terms (including valuations) may be less favorable. However, this is not as important as the 2nd point.
2. When you exit (including going IPO to some extent): Exiting in a hot market is far more valuable than exiting in a poor market when it's a buyers' market and risk-appetite for acquisitions is lower. To that end, exiting during 98-99 or 2006-early 2008 was the best thing you could do.
Raj

Yes, but within reason.
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