The case for starting in a slump
LinkedIn went public ten days ago. It was started in the wreckage of the dot-com crash, which its founder regards as no accident.
It’s much better to start during an economic downturn. Partnerships are easier; hiring is easier; and the competition starts later.
Reid Hoffman has said he learned this by doing the opposite first. His first company, SocialNet, started in 1997 as the technology boom was gathering speed, when every good engineer had several offers and every idea had several funded competitors. LinkedIn began at the end of 2002, when the boom had collapsed, and launched in May 2003. This month it listed on the New York Stock Exchange and its shares more than doubled on the first day.
His three reasons are concrete. In a downturn, larger companies take meetings with small ones because they are looking for anything that might help, so partnerships are easier to arrange. Good people have been laid off or are bored at shrinking employers, and they will join a young company for less. Investors are cautious, so fewer copies of each idea get funded, and a new company has time to build before rivals arrive.
The argument has a matching cost. The same caution that keeps competitors away also keeps money away from the founder. Raising a first round in 2002 or 2009 was hard, and many good companies never managed it. Businesses that sell to other businesses face customers who have frozen their budgets. A downturn helps a company that can live on very little and build for the recovery; it hurts one that needs customers to spend now.
There is also the founder’s own position. Starting in a recession is easier for someone with savings or a successful earlier career, as Hoffman had by 2002 after years at PayPal. For someone who has just lost a job, it can mean spending the last of the savings when the risk is highest.
Nobody chooses the economy they start in, and waiting for a downturn is not a strategy. The useful point is the reverse: a slump is not a reason to wait.