Good startups emerge in bad times. Here are 57 startups worth billions that launched during the Great Recession
Good startups emerge in bad times. Here are 57 startups worth billions that launched during the Great Recession
If you ask venture capitalists why they invest in startups in economically challenging times like these, you’ll hear a common refrain: Some of the most successful companies in the tech industry were formed or came of age in similar periods.
Apple Inc., Microsoft Corp. and Oracle Corp., for example, were founded in the wake of the mid-1970s recession. Cisco Systems Inc. was launched soon after the double-dip recession of the early 1980s and Nvidia Corp. in the aftermath of the early 1990s one. While Google LLC and Salesforce Inc. were founded in the late 1990s, both rose to prominence during and immediately following the dot-com recession of the early 2000s.
Economic downturns can be as good a time as any to launch startups, Y Combinator co-founder Paul Graham said in a 2008 blog post titled, “Why to start a startup in a bad economy.” One big reason for that is there tends to be less competition because fewer people are willing to take risks, Graham said.
“Technology trains leave the station at regular intervals,” he said. “If everyone else is cowering in a corner, you may have a whole car to yourself.”
At the time Graham wrote his post, the world was in the middle of the Great Recession, which turned out to be the deepest and longest-lasting downturn since the end of World War II. Despite that, many founders seemed to have similar thoughts as Graham about the opportunities such times present. Just like previous ones, that recession proved to be a propitious time for launching startups.
Airbnb Inc., the hospitality giant, for example, was founded in 2008. Taxi service behemoth Uber Technologies Inc. and messaging app developer WhatsApp Inc. were started the following year.
All told, 59 Bay Area companies that were either founded or raised their first rounds of funding in 2008 or 2009 sport valuations today of at least $1 billion or were acquired for that much. Of those that achieved these high valuations, 23 are public companies.
Here’s a look at the Bay Area companies born or first funded during the Great Recession whose current is at or above $1 billion or the price they were bought for was at that level, according to research from PitchBook Data:
Busts are preceded by booms
Beyond reduced competition, there are other reasons why tough economic periods can be good times to launch startups, experts say. One of them, somewhat ironically, is that most busts are preceded by booms, said Robert Hendershott, a finance professor at Santa Clara University’s Leavey School of Business.
Flush economic times tend to produce thriving startups. The success of those companies makes it easier for the venture investors who backed them to raise new capital, Hendershott said. When a recession hits, venture investors are often flush with uninvested cash they’ve raised based on their past successes, he said. That free cash can be used to back the next generation of startups that launch during the downturn.
Indeed, from the beginning of last year through the third quarter of this year, U.S. venture firms had raised nearly $300 billion of new capital, a gargantuan sum. In the first nine months of this year alone, those firms had already raised more money than they had in all of last year, which was a record amount at the time.
“It’s typical to have a lot of ‘dry power’ ready to invest (in a recession), which we are seeing right now,” Hendershott said. He continued: “There is a lot of money available for the startups they like.”
Another reason economic downturns can be good for startups is how they affect the labor market, Hendershott said. During boom times, the tech giants and other established companies tend to hire people left and right. To recruit workers, they often offer healthy salaries and boost their benefits and perks, he said.
During this past boom, many such companies gave their workers plenty of freedom to work remotely, he said. Meanwhile, startups with much tighter budgets struggled to compete for workers.
In a bust, many of those established and mature firms respond by freezing hiring, cutting salaries or laying off mass numbers of workers. That can make it easier for startups to find and recruit employees, Hendershott said.
“You’re not competing with super high salaries and free massages any more,” he said.
Being efficient is key
But perhaps the most important reason why tough economic times can be good periods to launch startups, is because they force companies to operate as efficiently as possible. That’s crucial, because the less cash a company needs to operate, the better its chances of surviving for the long term, Graham said in his 2008 blog post.
During recessions, startups have to reserve their cash for the essentials, said Kyle Stanford, a senior analyst at PitchBook.
“Companies starting in times like these need to focus more on building a sustainable business with fundamental growth rather than spend their money on new offices and other things that turn out to be frivolous,” he said.
Startup founders and investors are about to learn that lesson all over again, Sequoia Capital said in May in a presentation to heads of its portfolio companies.
This is a “Crucible Moment” for startups, the firm said. With the Federal Reserve raising interest rates, the time of easy capital has passed, it said.
That change has huge ramifications for startups, Sequoia said. Previously, the most successful startups were those that were spending cash prodigiously to build their businesses and market share, the firm said. Now, though, those companies that spend cash freely are the worst performing of the lot, it said.
Founders should adjust their strategies according, the firm said.
“Look at this as a time of incredible opportunity,” Sequoia advised. “You play your cards right and you will come out as a strong entity.”
