Building and Backing Startups in a Recession

Cut back

With the economic climate being heavy on the minds of investors, it is important to remember that a time of recession is not always doom and gloom. A great number of successful companies got their first boost towards success during a recession. Companies such as Apple, Atari, and Oracle all began their steady climb to dominance in a time when the headlines held little more than depressing news for those interested in growing their portfolios.

Startups in a Recession

TechCrunch’s Jason Kincaid recently posted a report that chronicled his visit to UC Berkeley for Y Combinator’s Startup School 2009. During this event, hundreds of entrepreneurs from around the United States gathered to listen to some of Silicon Valley’s most seasoned and successful founders and investors share their insight on building a new company in a recession. Some of his takeaways from this conference include the following:

• Entrepreneurs have to run their business cognizant of the times we are in. They must be aware of the changing environment around them and prepare for those changes without developing bad habits in the good times.
• Startups need to have a hard dollar ROI if they hope to gain interest from an investor.
• It is important for an entrepreneur to do his or her research to determine who they should ask for money.
• Entrepreneurs must be able to show there is a market – people who will spend money on a product.
• Valuations haven’t changed much and founders and investors will pursue a solid business model.

Businesses That Thrive in a Recession

This month, BusinessWeek featured an article in which reporter Spencer E. Ante explored examples of entrepreneurs who seem to thrive in adverse conditions. One in particular who appears to have a great tolerance for risk is Caterina Fake, who gave up an executive-level job at Yahoo! to launch a new company. Of course, she already had the successful Flickr under her belt and knew she could make waves with the new site, Hunch, which uses the experiences of others to help people make decisions.

The real test, of course, are those companies that got their start in an economic downturn and are still thriving today. On the BusinessWeek list includes Hewlett-Packard, Atari, and Apple. Let’s not forget that little company that has become the mammoth Microsoft.

Pick a Lean Startup

The most important thing to remember is to invest in a startup that knows how to take advantage of those elements that are easily available or even considered “on sale” due to the recession. A number of companies are offering their services for much lower prices in order to remain competitive and these startups can benefit from the added ability to contain costs, while ramping up strategies for growth in a recovery. It is not necessarily a surefire way to success, but it has worked very well for a number of startups that have become the powerhouses they are today.