5 Ways Recessions Help Startups

While everyone is running around yelling about how the sky is falling, I felt that it was necessary to point out the optimistic side of the economic downturn for startups.

Sequoia Capital started an uproar last week when it gathered together its CEOs and told them that they were basically doomed. While times will be tough, tough times also bring amazing opportunities and add extra incentives to innovate.

Here are 5 ways the recession will help startups:

1. Inherently less competition

With presentations that start with "Death To Good Times" like that in Sequoia's recent presentation, entrepreneurs that are slightly less risk averse will be deterred from pursuing their ideas. What that means is that those entrepreneurs that have the capability to get funding and traction will have a much easier space to grow and grab market share than the peak of the web 2.0 era.

Additionally, big companies like Yahoo! and Google are not going to focus on risky ventures that require a lot of innovation. They are going to focus on surviving the storm. That means that markets where entrepreneurs might have thought to be dominated by Yahoo! or Google or any other big company will become a lot less contested. For example, Google was moving aggressively into cloud computing but since they probably are now worrying about their stock that fell 40% in the last few months they will want to tighten expenses and focus on their core product (I hypothesize).

2. Companies take a long time to build

This recession/depression is not going to last forever. A lot of people are worried that this is going to be worse than the great depression. That's bullshit. Our world economy and technology has progressed too far for us to be subject to "runs on the bank" and silly economic pitfalls that plagued the early 20th century. If I had money right now, I'd be averaging down into leveraged index ETFs. Mark Cuban had a good post on this.

As such, we have to assume that someday the economy is going to come back to life and when it does, those that were building their company through the recession will be in an excellent position to grow with the economy. We have to realize that the build and flip mentality was never fundamentally sound, by building a "real" web business that focuses on cash-flows, there should be no reason why entrepreneurs can't build real web companies.

3. There will be a fundamental shift towards cost-saving services and cheaper alternatives, these are usually facilitated through web applications and services.

For example, advertising in traditional media sucks. People did it because they had a buttload of money to burn. As companies see their budgets tighten they will want to start doing a better analysis on their spending and try and spend in areas where there will be similar results at much cheaper rates. That means going to buy CPM advertising, sponsoring FB and iPhone applications, doing page takeovers, etc.

This transcends just advertising of course, the function of a web application is to help alleviate some pain to provide a cheaper and more streamlined solution. So if I were in a company that had a lot of contractors, I would probably just tell them to work at home and check in with me through basecamphq.com. Or instead of buying a full-fledged office suite from Microsoft, I'd opt for just using Google Docs (which is what I'm currently doing)

4. People will gravitate towards cheaper entertainment, the internet is free.

Traditional entertainment is really expensive. Disneyland costs $70 to have fun at the park for the whole day, that's about 4 months of World of Warcraft. As the economy gets worse people are going to stay home more often because going out is expensive (eating out, going to movies, etc.) and that means they are going to use the internet more.

5. There are plenty of recession friendly businesses.

Mashable posted a really good post on some ideas for web 2.0 recession businesses [here]. I'm not going to reiterate all their ideas, but you should read it if you're interested. Other good angles for recession friendly businesses are deal websites, online dating (much cheaper than going to bars), and free games.

In summary, perhaps I'm overly optimistic, but I think that in any situation there are opportunities for the smart entrepreneur to shine. Stop being scared and innovate!