How good or bad will our economy be going forward? No one knows for sure, of course. But as I write this article US unemployment is approaching numbers not seen since the great depression, and the world economy as a whole isn’t much better off. Yet the US stock market (with the benefit of massive central bank and congressional liquidity injections) seems to be signaling that it won’t be all that bad; that we’ve seen the worst of it. My guess is that market signal changes quickly and dramatically, based upon my reading of the current crisis and my experience in business going through several other major downturns. By the way, the advice in this article really applies to ANY economic downturn, not just this very unique one we are currently in. Regardless, things aren’t great now and never are when the economy falters. So why would anyone in his or her right mind think of founding a software startup company in these economic conditions? Surely that’s lunacy, right?
But business success is often borne out of counter-intuitive thinking. Going against the grain often works because everyone is doing the opposite which opens up unique opportunities. As an example, most startups don’t thrive by copying exactly what the current market competitors are doing. Sometimes those out-of-the-mainstream startup strategies look crazy at the time – otherwise all of the current market players would already be doing it!
I might also add that many of these points listed below apply to continuing a startup that is in its infancy or starting up a new business unit within a larger software business. Many if not most folks would shy away from any of these types of “risky” activities during hard times.
One shouldn’t dismiss on the surface “crazy” thinking. But again, why would I want to start a mobile software or SaaS company when business looks so bleak? Hear me out; we’ll take a look at some possible good reasons:
Many great software companies have been founded in major downturns
Google and Microsoft are two noteworthy industry giants that were born in bad economic times. But there are many other well known software-based companies that fit into this category such as Adobe, Slack, Instagram, Uber, AirBnB and Cloudera to name just a few. So my first point is that there is plenty of empirical evidence that starting a software business in a downturn can work, and work big time.
Software businesses are inherently capital efficient
When done well, at least, and compared to other types of “high value” businesses. It’s never been less expensive to start a software company than it is today. While programmers are an expensive resource, modern development tools and frameworks have made the software development process far more efficient than in years past.
In addition, many successful software companies have been founded by programmers themselves coding the initial product by working after hours at their kitchen table. So in these case, the initial capital outlay is for product development is essentially “zero”. You can put up a home-baked website for no cost, and even a professionally developed one for a few thousand dollars. There are many avenues of online marketing which are either free or very inexpensive. So it’s never been easier to start a software company on the cheap. Compare this to a hardware business which has many more unavoidable costs just to prototype the initial product. To get to market you then need build a manufacturing facility or cede margin to a contract manufacturing house, as well as build (and often write off) a lot of inventory. Software businesses can launch with the fraction of capital necessary for a hardware tech company, as well as many other types of businesses worth being in.
Of course it’s also possible to run a software business in a very capital-inefficient manner. You could hire 20 expensive outside sales reps before reaching real market traction, overbid for PPC Ads which are then not effective due to a lack of expertise, hire a “branding” firm to wordsmith your marketing messaging for a few hundred thousand dollar, etc. It’s quite easy to waste money; it’s done ALL the time. But usually this happens in a VC-backed or other institutionally-funded company, where money is spent simply because you have it. Even though common, that’s stupid! But we’ll leave that discussion for another day. Suffice to say that software is an industry ideally suited for bootstrapping or modest external investments in the early days.
Bad economy software startup companies are well-positioned for the eventual upturn
One of the major reasons that starting in a downturn can work, while a counter-intuitive approach, is that there is likely to be a nice upturn coming soon after any downturn. If you start a software company in a bad economy (and this is likely to be a REALLY bad one), you’ll be well positioned when the upswing comes. And I believe that when this upturn comes, it has the possibility of being very steep and long.
Like most things in life, timing matters. If you start in a downturn you may be lucky enough for the upturn to start once you’ve already built your product, made unavoidable startup mistakes and floundered to find your market niche and marketing message. So if you’re lucky, you’re market tested and ready, just when the economic conditions are primed for increased spending and growth.
Market timing is hard and opportunity matters more
The bullet point above describes what I feel is the best case timing of a product ready for prime time, coupled with an economy poised for an upturn. But in reality, it’s folly to try to time a market with a software startup. The actual BEST time to found a software startup is the MINUTE you see the opportunity. Cloud, SaaS and mobile software markets move FAST. Waiting only reduces your chance of someone getting to where you want to be before you.
An important point to consider , however, is to not confuse actual opportunity with what you’d like it to be. An example is someone who starts a software company simply because they lost their job in an economic downturn, versus a founder who starts a company due to a REAL opportunity they’ve discovered to fill a real, unmet market need. Now, necessity can truly be the mother of invention, so it’s possible that both of these things can occur at once. But it’s important that the second scenario is the real driver of the startup.
Businesses & consumers seek innovation in difficult times
Another reason that starting up in difficult times can be advantageous is that fact that painful times can cause potential customers to re-evaluate what they are doing. When times are good, it’s often very easy to stick with the status quo. But when times get tough, folks are more open to change that might increase their revenue or decrease their costs. Saving money in particular is often considered less important in good times when the focus is on MAKING more money. This can open a big opportunity for a new software vendor with a lower cost approach.
Difficulty is often a prerequisite for evolution into a new paradigm in any business. So new vendors with new product approaches that may have seemed risky in good times may be perceived as a potential lifeline to customers when they are struggling. This is a real opportunity for an innovate startup mobile software or SaaS company.
Incumbent market players are vulnerable
While startups typically aren’t blessed with a lot of resources (which is likely even more severe when starting at an economic bottom), they also don’t have a lot of high fixed costs and excess process in their operations. Their incumbent competitors often do have these high costs, which become a real liability in a downturn. As a result of falling revenues, these existing market players are often forced to make painful cutbacks in personnel as well as marketing and product development programs, which can damage their ability to compete going forward. This will make them more vulnerable to competition. In the worst cases the damage could be fatal to their businesses. All of this spells opportunity for a lean, nimble startup competitor.
Businesses resources are cheaper and often more plentiful
I’m sure that you’re familiar with the phrase “buy low, sell high. There is no better time to “buy low” than when the economy is in a downturn. Good people are looking for work, so there are often more candidates to choose from and available at lower salaries. Many products and services, office rent, etc are cheaper as well. As they are today, interest rates are often very low, so buying on credit can be very cost-effective (as long as you have the cash flow to make the payments, of course!). In general, your negotiating power is higher if you are able to spend money in times like these, even if you are relatively small. In a better economy, your modest buying power may be an afterthought in a booming economy. But in a downturn, a potential order from even your modest software startup company will stand out to hungry vendors.
Competition is reduced
As discussed above, in a downturn some existing competitors will be damaged enough to go out of business. Even those that remain will likely be less active in their marketing and product development programs. In addition, there will be fewer new startups form and enter the market because “people would think it’s crazy to start a company now”. Unless they were convinced by this article or some other counter-intuitive argument, of course!
Therefore it’s easier to “get noticed” in the marketplace. This is much of the battle for a startup. Getting noticed is much harder when everything is booming and there is a large amount of competitive promotion drowning your message out.
You’ll build a lean startup software company with good culture and operating habits
I not sure who originally coined the phrase, but when it comes to the early stages of a software startup company, “Survival is winning” couldn’t be more true. And learning how to survive, not matter what, is probably the most important skill any founding startup team needs to have. Whether it’s that you’re bootstrapping or because your investors are placing you on a “budget”, learning to survive with limited resources will ensure that you’ll build good operating habits. These habits will create a much more resilient and profitable enterprise when thing turn upward and for the long term as well. The conditions for this to occur are never more true than when starting up in an economic downturn.
So, is it crazy to start up a software startup company in a Pandemic? If done well, it’s crazy like a fox, in my humble opinion. Can you add to that list of reasons to found a startup or to continue software startup activity in these trying times? Maybe you have your own list of counter arguments why this is crazy to even consider. Enlighten us with your own mobile software, Cloud or SaaS stories. Please use the comment field below to throw your opinions into the mix.
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