The Best Time to Build
The opportunity cost for pursuing a good idea is very low and the consequences of failing with a bad one are very high.
Tl;dr
The mantra is “bad times create strong founders and strong founders create good times” but nobody really knows.
It’s obviously a perilous time to invest and being a founder is a super concentrated investment.
In a bear, the opportunity cost for pursuing a good idea is very low and the consequences of failing with a bad one are very high.
Knowing the difference means doing extra work and taking extra time up front but you don’t have to do that alone.
The party line these days seems to be that “it's an amazing time to start a company'.
But starting a company is a hyper-concentrated investment of the founder’s time and no one is saying that it's an amazing time to invest - let alone actually investing like they believe it. Investors are scared by downstream uncertainty, their own fundraises, a recession, cost cutting, compressed multiples, and an unclear path forward.
Why - during the midst of a brutal bear and by all accounts at the early stages of what stands to be a painful recession - might “now be the best time to start a company” in recent history?
The conventional wisdom has three answers:
Loose capital promotes structurally worse P&Ls (when money is cheap you spend more of it). A dearth of capital encourages discipline which should increase the odds that when something works, it will be worth owning (can be profitable).
A bull market breeds lots of losers/loser categories through inorganic (speculatively-funded) competition. There’s fewer distractions and especially fewer competitors when the builders just focus on building and the tourists head for the exits.
Boundless optimism leads to costly false positives. You’re less likely to wind up pursuing the wrong customers, ideas, products, GTM, etc. when budgets are tighter, expectations are higher, and patience is shorter. When you do get positive feedback in a bear market, you can take it much more seriously.
Put simply, “bad times create strong founders and strong founders create good times.”
That all could be right but taking a VCs word for it is like asking a barber if you need a haircut. For people paid to sell money, it’s alway a good time to buy it. It's true that great companies have been started in bear markets. It’s also true that great companies have been started in bull markets, and on Tuesdays. Causation and correlation are just really hard to figure out.
Almost everyone agrees it's a perilous time to invest, implicitly or explicitly. Risks are harder than ever to figure out. So are the potential rewards. That is just as true for founders as it is VCs.
But now in 2023, there’s lower opportunity costs to leaving/starting something new when your public company RSUs or growth stage options are blown up. Conversely, your prospects are much worse in the event that you can’t raise or the company doesn’t work out after you do.
This means that right now, the opportunity cost for pursuing a good idea is very low and the consequences of failing with a bad one are very high.
So it’s an amazing time to be a founder for the right business with the right characteristics. It’s a terrible time to start speculative businesses, bank shots/double back flips, or anything that needs capital as a differentiator. But for things that score well on capital efficiency, path to revenue, value proposition, etc., it’s an incredible moment to bet the farm and start a company.
The trick is telling them apart.
That requires extra work upfront to gather signals and data. Make this investment like any other: through rigor and due diligence. Take more time and do more work to determine if you have a winner (remember, the signal will be harder to come by but more meaningful if you do) and then hunt it down.
When bullets are more expensive, make sure you’ve got an elk and not a squirrel before you fire one. Seek out folks who can help you spot the difference.
Orginally from Slow’s Snail Mail newsletter and co-authored with Will Quist
Thanks to John Neamonitis, Amy Cheetham, Derrick Li, Jason Spinell, and Frank Rotman for feedback and edits.