COVID-19 created an exceptionally difficult climate to run a business: the least affected were forced to make employees transition to remote-only work, but the most affected had to close permanently because their business models were materially damaged. However, if history is any guide, recessions are actually ripe environments for company creation.
Why do people think that now is the wrong time to start a company?
Companies all over the world were affected by this coronavirus both positively and negatively. Even though some companies like Zoom were able to actually grow their business, the narrative around the general economy was decidedly negative with historical market volatility, brick and mortar businesses closings, startup layoffs, travel and hospitality grinding to a halt, and emergency funding by national governments all dominating headlines for months.
Taken all together, starting a company now may seem inconceivable. In general, the most frustrating and challenging constraint for an entrepreneur to overcome can be indecision and the Unknown: it’s often easier to make a decision around a ‘yes’ or ‘no’ answer than a ‘maybe’. The central problem with this pandemic is that it has created an indecisive environment in almost all parts of life: no one can really plan more than a few months ahead. This may seem like a disadvantage for a startup, but in actuality, it’s an advantage:
Startups are more operationally nimble than big companies, which allows them to navigate uncertain times with more speed and agility than a company with a bloated headcount.
With remote collaboration tools getting better and better, recruiting, hiring, and managing a remote team has never been easier. (FWIW, Capbase is fully remote and distributed around the world.) Work can be done asynchronously across time zones, and there is more tooling built every day for tasks and projects to make sure teams are on the same page.
We decided to lay out the reasoning behind why it is now a great time to start a company and asked trusted advisors and investors for their thoughts on the subject.
Why now is the best time to start up a company
Historically speaking, economic downturns have resulted in increased company creation. Some of the most successful technology companies of today were founded during the Global Financial Crisis:
"The last recession gave birth to Square, Stripe, CreditKarma, NerdWallet, Uber, Airbnb, WhatsApp, Instagram, and others. Whatever changes we face in this pandemic- positive or negative, they bring up new customer needs.
Online education and e-commerce have seen the type of growth that wasn't expected for another decade. It opens up many new avenues of opportunity, and we're excited to invest in companies building the future!" Sheel Mohnot, Founding Partner @Better Tomorrow Ventures.
1. Acceleration of the inevitable: in person to digital
The new global context has forced people to migrate a lot faster from offline to online, meaning that several solutions to replace offline interactions are a real and immediate need.
Trying to build a telemedicine solution before would probably have a high customer acquisition cost and a prolonged adoption rate - not anymore.
2. Incumbents struggle to move quickly
Incumbents have mostly gone into preservation mode. These massive entities are, in general, not looking to explore new markets but to reduce their costs and increase efficiency until the storm blows over.
This shift to austerity-mode means you can analyze and address new market needs without as much competition. In their pursuit of efficiency, these large companies will also be keener on buying from a new startup as long as the solution helps with their austerity goals, something that wasn't as easy before.
"The switch from prosperity-mode to austerity-mode and forced-online interactions can be a great time to start both Enterprise and Consumer businesses that are trying to re-segment pre-existing markets.
Startups with good enterprise solutions will now have greater chances as some large companies have gone into austerity mode and started looking to reduce costs and become more efficient.
Consumer businesses that have tried to replace offline interactions have previously faced expensive customer-acquisition costs and slow adoption because the previous regime mostly worked. Now those offline companies are either closed or risky, meaning people have to evaluate online alternatives to well-established behaviours." Kevin Mahaffey, Founder @Lookout
3. Achieving Product/Market Fit might be more accessible.
We already know that incumbents have mostly gone into preservation mode. Startups are naturally good at building something and validating their assumptions through testing, and now it’s probably easier to do so.
There are two main reasons for this: there's less competition thinking about building something new, and even less actually building anything. It's easier to meet with prospective customers as most sessions are happening virtually, and people are more open to trying new things.
Startups live off people's needs and openness to adopting new solutions. They operate based on fast and continuous feedback loops to validate and iterate solutions to what the market needs. Today’s conditions increase the odds of any new founder achieving Product/Market Fit.
4. There's still VC money to be invested.
People may fear this is not the most incredible time to raise investment, so it’s probably best to delay turning your dream into reality until the capitalism tides turn in their favor.
There's still a lot of VC money to be invested.
Recent research by Michael Mauboussin shows that Venture capital funds have an AUM of approximately $455 billion, including a $120 billion dry powder. The equity capitalisation of the U.S stock market is roughly 27 times the size of AUM for buyout funds and more than 80 times the size of venture capital funds.
VCs live off investing in startups, they're still taking meetings, in fact, probably more than ever, as almost all of them are happening virtually.
Also, smart VCs already know that some of the best startups are founded in downturns, so they're observing, waiting for the right moment to spend all the money currently sitting in their bank accounts.
5. More Talent available worldwide
Talent is generally more available during recessions but today we have special conditions that we had never had before. An incredible amount of skilled professionals lost their jobs and are out there, hungry for a new challenge.
The shift to remote work has shown companies they can save money in offices and still have very efficient organisations and cultures. With this major shift it’s no longer a talent pool, rather an ocean pool!
The world is your market, and you can hire the right people to help you build a company at a very reasonable price.
"Talent is more available in a recession, and generally at lower prices, founders end up giving more equity to new hires, which brings more skin to the game.
Many talented people out of jobs decide to start their own company; these companies are more resilient and agile because the founders' mindset is that they can't afford to fail given the recession context. Smart investors will be ready to backup companies heavily during a recession." Jude Gomila Founder & CEO @Golden
How to start a company now
Analyse the market, spot new trends, which habits or behaviours have changed? What new possibilities does that open? Could you be a painkiller to a massive problem?
Build your hypotheses and validate them quickly; remember, it has never been more accessible to do so.
Whenever you're ready to turn your dream into reality, Capbase is the place where startups start. You can have your business running in 3 days, hire your first employees, issue stocks, find your first investors, and much more. We simplify the whole process of starting up, enabling you to focus on doing what you do best - build a great business.
To sum up:
- Downturns are historically associated with the birth of great companies
- There are new opportunities and problems to solves
- Incumbents are in self-preservation mode, they’re moving even slowly
- There’s a lot of VC money to be invested in amazing companies
- It might be more easier to achieve Product/Market Fit now
- There’s more talent available right now, at an accessible cost
- You can and should take advantage of remote work and hire talent globally