Is a recession a good time to start a new venture?

Are you contemplating launching a startup in the throes of the Covid-19 induced recession? John Mullins shows why recessions can be a good time to start a new venture. Even better, he argues that, even in a recession, the customer is not only king. He or she can be your VC, too!

Does timing matter in starting a new venture? Indeed, often it does. But not for the reasons often posed. When timing really matters is when the changes always going on around us – a new technology, social trends, or whatever – make it possible to do new things or offer new goods and services to consumers that they did not want or need before.

These days, amid a Covid-19 induced recession, one might think it’s no time to launch a startup. But hang on for a minute. Many of the resources you’ll need to get started, or to start growing – people, office space, and more – are less costly than they were just a year ago, and easier to deal with, too. Why? The demand for many kinds of goods and services is down. The big companies aren’t hiring, they’re trimming their staffs. That fact alone could free up exactly the talent you need to complement the skills and networks that you bring to your venture.

Starting up

Consider Toronto’s Mimi Naghizada. In 2010, as the world was inching its way out of the 2008-09 financial crisis, Mimi wanted to wear hair extensions for her upcoming wedding and couldn’t find what she wanted at the local shopping mall. She figured – correctly, as things turned out – that other customers would have similar needs.

Mimi and her fiancé Alex Ikonn soon discovered that a confluence of new developments would make it possible – even easy – for the couple to start an e-commerce business that would sell hair extensions online. Even better, they would be able to get started with very little money, $25,000, they calculated.

Alex, already working for another start-up, knew that many of the building blocks were already in place. YouTube would enable Mimi and her sister Leyla to create and host videos that would focus on the hair-styling questions that women – potential customers – were asking on Google. With these videos, Mimi would soon build a commanding presence as a go-to resource on hair-styling issues. But that wasn’t all.

Alibaba.com provided Chinese suppliers of hair extensions on a wholesale basis, so Alex ordered samples from several, which were soon on their way. Meanwhile, WordPress made it easy to set up a website, and a company called Shipwire agreed to hold the inventory and fulfil the orders. 

All Mimi and Alex needed to get started was a bit of cash for the initial inventory of hair extensions in several shades. Happily, bankers’ offers of new credit cards with six months’ free interest were arriving in Alex’s mailbox regularly. The combination of credit card funding and a loan from Alex’s Mum provided the cash they needed. A mere six months after launching www.luxyhair.com, they were able to repay all the start-up funding. Within two years, sales hit seven figures and they were off to the races.

All Mimi and Alex needed to get started was a bit of cash for the initial inventory of hair extensions in several shades. Happily, bankers’ offers of new credit cards with six months’ free interest were arriving in Alex’s mailbox regularly. The combination of credit card funding and a loan from Alex’s Mum provided the cash they needed. A mere six months after launching www.luxyhair.com, they were able to repay all the start-up funding. Within two years, sales hit seven figures and they were off to the races.

Is launching a startup now really possible?

It looks easy, right? Alas, it’s not, even in 2020, with uncertainty swirling all around us. As most everyone knows, the entrepreneurial path is littered with failed start-ups. Why? Maybe the market wasn’t really there. Perhaps what was offered didn’t really solve any customer problem. Or the industry was brutal and a larger and deeper-pocketed competitor ate someone’s lunch. Or, all too often, the idea was good but the entrepreneurial team didn’t have what it takes.

Surprisingly, though, the list of successful companies that got their start in the depths of a recession is a long one. General Motors in 1908. Hewlett-Packard amid the great depression in 1939. FedEx in 1971. Microsoft in 1975, during the OPEC oil embargo and its ensuring recession. And many more.

More recently, Twilio, the B2B company that brought voice, video, and texting to websites and apps, launched in November 2008, just after Lehman Brothers collapsed.  “If you have conviction and you’re solving problems for customers,” says Twilio founder and CEO Jeff Lawson, “that’s all you need.”

The customer is king – and perhaps your VC, too

Follow your customers, because that’s where the truth of the business is,” says Lawson. He argues that even when customers are reducing some of their purchases, they will pay for what they value, and often pay for it up front. “That’s a way to get customers to pay to get the company going,” he adds.

As Lawson suggests, and Mimi’s and Alex’s experience indicates, customers lie at the heart of almost every successful start-up, whether in good times or bad. But, as Lawson’s remarks also indicate, it’s not always necessary to rack up credit card debt or seek money from your Mum, or pander to an investor. The customer is not just king: he or she can be your VC, too!


About the author:

John Mullins, an award-winning professor at London Business School, is the author of three best-selling books for entrepreneurs, including his latest, The Customer-Funded Business: Start, Finance, or Grow Your Company with Your Customers’ Cash. The book and his online course, Start-up Success: Five Proven Business Models, debunk the widely-held notion that an angel or venture capital investor should be every entrepreneur’s first port of call. A free download of Chapter 1 is available here.

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