There are three fundamental pillars to startup success – the team, the product, and the market. Choosing the right startup market is crucial for your success, but sometimes market factors are simply out of your control. If you can’t choose to avoid a problem, you need to learn to deal with it. Or even better – to use it as an opportunity.
Michael Burry, famous for inspiring the movie “The Big Short” and for making his hedge fund clients around $700 million by predicting the 2008 subprime mortgage crisis, has been saying that we’re currently sitting in the greatest speculative bubble in history. Moreover, he is not alone in his worries that a bear market may be coming.
While this could be bad news if you are a passive investor in the market, it could be exciting news if you are in the realm of startups.
Even though it is true that a bear market makes capital much harder to access, capital is not the most important factor that determines startup success. According to a study of 200 startups, access to funding accounts only for 14% of the difference between success and failure, while market timing accounts for a 42% difference.
“Put simply, the best time to start a business is on the heels of a recession.” – Scott Galloway
There are two simple reasons for this:
1. A Recession Creates Space in the Market
The companies that are barely profitable during a bull market usually fail during a bear market. While this is a shocking event for these businesses and their stakeholders, it might be positive for the economy in the long run.
The business failures driven by the recession serve as a beneficial forest fire – it burns old, dry wood, disperses nutrients in the soil, and opens up the forest canopy to sunlight, which stimulates new growth.
The old failed companies open up space for new, more efficient, and innovative businesses and even new market niches. And the rise in unemployment due to the failures (and mass lay-offs) increases the access to high-quality employees for cheap, at least temporarily. Both of these conditions are vital for the success of new companies that have great ideas and future demand for their products but are short on capital in the short term.
2. A Recession Mandates Innovation and Change
While a bull market is a great indicator for investors and businesses to keep doing what they are doing without risking a lot of innovation, a bear market is a great indicator that the status quo isn’t working and something has to change quickly.
Because of this, flexibility becomes the premium quality required to thrive in such a market. And while big businesses can be extremely inflexible because of the gridlock of the interests of their stakeholders and their big mass and inertia, startups are innovative, nimble, and adaptable.
Two great examples of startups that were successful during a bear market are Airbnb and Uber. A lot of people initially thought that it’s odd for people to rent out rooms in the home of a stranger or to get into a stranger’s car. Yet, the fact that everybody needed extra cash during the recession wiped out the stigma and helped both companies attract their early adopters.
In summary, don’t be afraid to start a business in uncertain economic times. On the contrary – the innovative nature of startups and their flexibility is what makes them perfectly suited for economic chaos.