Downturn is Perfect Time for Startups, Paul Graham Says

Paul Graham may be the founder of famed Mountain View, CA- and Cambridge, MA-based startup academy Y Combinator, but he’s almost as well known for his monthly essays about the technology business. His latest edition, out today, argues that it’s no harder to get a technology startup off the ground during bad economic times than during boom times—and that, in fact, it may be easier.

The 1970s—a time of extended economic stagnation—saw the birth of both Microsoft and Apple, Graham points out. A startup’s most important tasks, Graham asserts, are finding the right people and making something that customers want. During a downturn, it may actually get easier to recruit great co-founders and software developers, since they may be looking for work. And during hard times, there’s a premium on any product or service that saves customers money—so startups, which often “make things cheaper,” are probably “better positioned to prosper in a recession than big companies,” Graham writes.

The big challenge for entrepreneurs during downturns, of course, is that investors are feeling lighter in their pocketbooks, and therefore more cautious. Most investors are lemmings, Graham implies: “Everyone knows you’re supposed to buy when times are bad and sell when times are good. But of course what makes investing so counterintuitive is that in equity markets, good times are defined as everyone thinking it’s time to buy.” The key for startup execs and staff, he says, is to be as frugal as possible with the money they do raise—and to stay brave. When times get bad, too many hackers get conservative and  “go to grad school” rather than diving into the startup world. But hackers are investors too, “buying stock with work,” Graham says, arguing that “like any investor, you should buy when times are bad.”

Wade Roush is a contributing editor at Xconomy. Follow @wroush

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