Matt McCall is a co-founder and Managing Director of Draper Fisher Jurvetson Portage Venture Partners. He writes with great insight in his VC Confidential blog - I strongly recommend that you suscribe.
Matt's just posted an article on "why great companies get started in the downturns" that I found so profound that I want to republish it in full here, with full credit to him.
"I
have always been amazed by how many of our success tech stories, as
well as Fortune 500 companies, started during drastic down turns.
Innovation does not take a holiday, and in fact, thrives during
difficult times when pain & need are greatest. While the current
downturn is historic, it pails in comparison to the 22 year depression
the US experienced from 1873 to 1895, triggered by the Vienna stock
market crash. During this extended drought, a large number of Fortune
500's & major corporations started including Eli Lilly, IBM, Merck,
Hershey's, Gillette, Alcoa, J&J, Chevron, GE, AT&T, Abbott,
Lilly, Coors, Johnson Controls, Bristol-Myers and PPG to name a few.
During
the great depression (1929-1939), Texas Instruments, HP, 20th Century
Fox and United Technologies all launched. Since much of the Valley's
legacy came out of HP, the seeds for the current Silicon Valley were
planted while the stock market was crashing nearly 90% and unemployment
approached 30%.
Other periods: during the Oil shock & market
crash (1973-1976) Microsoft, Genentech & Apple started. The biotech
and PC revolutions emerged when the market was down nearly 50% and
inflation was racing into double digits. In the crisis of the early
80's (1980-1982) with mortgage rates peaking at nearly 21%, Amgen, Sun,
E*Trade, Autodesk, Adobe, BMC, EA and Symantec were created. The
question is why does this happen?
Dogs Will Try New Dog Food
When
everything is going well, few people or companies want to change
behavior, process or vendors. They have little incentive to do so and
risk upsetting the apple cart. However, when their hair is on fire,
customers & business partners are willing to try new or different
approaches to address the pain. So, while some would say that sales
cycles stretch out significantly during downturns, I would argue that
for new technologies that solve real problems, they compress
considerably.
Take Care of Darwin
Leading
entrepreneurs have a maniacal focus on efficient use of capital and on
fulfilling customer needs (versus nice to have's). During troubled
times, these entrepreneurs are even more focused on these. Cash is
spent only when absolutely necessary and no to few features are built
that aren't demanded by the customer. Those less disciplined will find
themselves victim to Darwinian realities. Companies "forged in hell"
have a much more durable and advantaged DNA coming out.
Power of an Equity Culture
In
these times, firms either bootstrap or fund themselves from modest
equity rounds. Credit, other than credit cards and such, is not readily
available. Furthermore, the start-up world is an equity culture versus
the credit/debt culture of buyouts. So, they are able to survive when
banks won't lend and credit lines are non-existent. Equity can be a
beautiful thing.
Weak Gazelles are pruned
During
boom times, sectors get overfunded and weaker competitors destroy the
economics for everyone involved. They create significant noise in the
market place, create skeptical customers by overpromising and
underdelivering and have undisciplined pricing policies. In hard times,
there are many fewer competitors which allow companies to scale quietly
during the trough and take significant market share when conditions
improve. Furthermore, these firms enjoy rational pricing, higher
profitability/margins and lower cost structures given their DNA.
So,
yes it is ugly out there and about to get even harder but start-ups are
used to hard times and are well suited, if managed properly, to thrive
in the downturn and accelerate during the recovery. The trick is to
stay alive one day longer than your competitors..."
Way to go, Matt... Time to Take Care of Darwin!