Should I start my tech company during the crisis?
💡 Together with Josef Brunner, Felix Haas, Florian Leibert, Christian Miele, Mirko Novakovic, Hanno Renner, Laura Tönnies and several other successful business angels and founders, we will host a virtual event on May 14th, to explore this topic in more depth. More information
In these tough, unprecedented times, some brave souls are thinking about starting up a new tech company or have recently done so. Are they “crazy like a fox” or just plain crazy?
After 20 years of investing in early-stage tech in Germany, we say they are probably foxes.
We’ve also talked with angel investors and founders from our network who started or backed enterprise software companies out of Germany in times of crisis, and they agree.
Let’s look at the big picture. To start up in a crisis is an important timing consideration, but not the only one. Others include your age and the situation in your chosen market segment. (“Am I too early or too late?”)
We’ve all heard “A meteor strike got rid of the dinosaurs, giving an opportunity to the mammals. Become a mammal!” In start-up language this means “Crisis accelerates change, which is a catalyst of innovation. So quit your day job and start a company!”
Why is it a good time to start your company during this or any other crisis?
A great read from 2008 on this subject comes from Paul Graham, who rightly points out that “… the state of the economy doesn’t matter much either way. [Tech startups] succeed or fail based on the qualities of the founders.”
True, but if you have a great founding team and your other timing considerations line up, here are eight excellent reasons to start now, during the crisis, and not later:
1. You need to start small anyway. During the first 18–24 months you should be focused on developing your initial product and testing the technical and business propositions with friendlies. This requires a team of typically < 6 people. It is an ideal time to convert to “lock-down” mode and disappear down your team’s rabbit hole to show up some time later with a beautifully crafted piece of software solving real market needs.
2. Capital is scarce, which has its charms. In a crisis, capital tends to dry up, especially at the pre-seed and seed stages. Business angels bemoan their losses in the stock market, corporate incubators are put on “investment stop” by the CFO and it gets harder to ask friends & family for cash. Seed money from institutional investors (including government sources) is less impacted by a crisis and the early-stage institutional funds raised since 2017 in the DACH region are open to writing smaller tickets (see chart below). Unfortunately, these sources also tend to become more cautious in a crisis.
The charm side: If you are successful in raising seed funds, you might be the only company in your segment to do so. This means free running room, unhampered by contemporaneous competition. Lack of freely available cash also reinforces the discipline to build a lean, cash-efficient company.
3. Incumbent competition is distracted. The crisis lets you rapidly catch up with and even overtake (product-wise, anyway) risk-averse competitors who are stalled in hibernation/survival mode.
4. Customers get creative. In a crisis, creativity usually means customers are looking for ways to save money, through lower prices but also through cost-saving innovations. Customers are more likely to question the status quo, re-evaluate existing contracts and might be more open to switch.
5. There’s more choice in hiring. In a downturn, more people are looking for jobs, often with lower compensation expectations. Make sure to maintain your high standards for acquiring talent; in hiring, more choices do not necessarily mean better choices.
6. Everything gets cheaper. You can negotiate great deals during a crisis on everything from rent to marketing spend.
7. You can launch at take-off. When the crisis starts to recede, your product will hopefully be ready for launch, just as markets are starting to take off again. This timing is obviously much better than starting up 24 months before the crisis hits, for example.
8. There’s dry powder for the next bull cycle. Before the current crisis hit, venture capital firms were busy raising funds (see chart below), and this dry powder will benefit current start-ups as they raise their first institutional funding rounds in the next 12 -24 months. Again, excellent timing.
In sum, start-ups are challenging, and the pandemic certainly doesn’t make the work any easier. But if you’re able to raise money in the next six months, your chances for long-term success, at least from a big-picture perspective, will be excellent.
If you’d like to attend a more detailed discussion on this topic, we’ll be hosting a virtual event on May 14th, together with some of our friends from the business angel and founder community.