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Is a recession a good time to be an entrepreneur? Has it changed the economics of starting a business?

Silicon Valley veteran Guy Kawasaki believes the answer to both is "yes".

In a post on Building43, he argues that there are new economics of entrepreneurship:

  • Talent is free or cheap. Thanks to the ills of the recession, Kawasaki writes "If there was ever a time to get great people for free or cheap, this is it".
  • Tools are free or cheap. Citing open source, Kawasaki says "You’d really have to work at it to spend a lot of money for the tools to build something these days".
  • Storage, bandwidth and servers are free or cheap. Thanks to cloud hosting services, "you can get more storage, bandwidth, and servers for $1,000 a month than you’ll be able to use".
  • Marketing is free or cheap. Twitter is "the single best way to market your product or service" and Facebook "is a close second". Both, of course, are free.

Having started a number of online businesses over the years and being in the midst of starting a couple of news ones during this recession, I disagree with Kawasaki. Here's why.

Talent isn't free or cheap.

There are plenty of good people who are unemployed or under-employed right now but that doesn't mean that most of them are willing and able to work for a pittance. Furthermore, from what I see in my network, the best people don't have any shortage of work.

But whether or not you can find decent worker bees at little cost is besides the point in my opinion. Trying to use "free or cheap" labor is not a good long-term strategy for attracting and retaining talent. As they say, you get what you pay for, recession or no recession. When the people you hire feel like they're being taken advantage of and aren't invested in your success, don't be surprised when they fail to deliver what you expected. And don't be surprised when they drop you like a bad habit once they find an opportunity that compensates them fairly.

Tools are cheap but that doesn't mean building a skyscraper is.

Open source solutions are great and can significantly reduce your costs. But if they're not put in the hands of competent, talented developers, they're worthless. If you give a monkey a hammer, don't expect him to build you a house; if you give a novice developer PHP and MySQL, don't expect him to build you a scalable web application.

Open source, in my opinion, is a double-edged sword for this reason. While lots of people know how to build applications that seem to work with the free tools that exist, a much smaller number know how to build applications that work at scale. You can easily find someone who can build you a database-driven website with reasonably complex functionality; it's much harder to find someone who can build a database-driven website that won't go down for the count when you get slammed with a few hundred thousand visitors in a few hours.

Storage, bandwidth and servers can be cheap but true scalability requires investment.

When Kawasaki says "you can get more storage, bandwidth, and servers for $1,000 a month than you’ll be able to use", he may be right. That's because most sites don't need $1,000 worth of storage, bandwidth and servers. For a heavily trafficked site with hefty database interaction, trust me: you're not going to throw your web application onto a "cloud" VPS and survive.

A couple of observations:

  • Many of the startups that tout the advantages of cloud hosting and its benefits don't have enough usage to speak credibly. Most would get along just fine with a dedicated server or two.
  • To the extent that cloud hosting convinces startups that they don't need to worry about building scalable applications, this is folly. Any startup that thinks the cloud will solve the challenge of scalability is missing the point. Caching, database query optimization and the use of high-performance/lightweight HTTP servers, for instance, result in better applications and better architectures and are things that every startup should look at.

Real marketing isn't free.

Twitter and Facebook can be great marketing tools depending on the type of business you run. But how many highly-successful and profitable startups can you name that relied solely on Twitter and Facebook to market themselves?

If you limit your marketing efforts to services that are free, you're probably missing your greatest opportunities. Kawasaki himself notes that his startup, Alltop, isn't exactly taking over the world despite the fact that he's been "evangelizing" it on Twitter for 18 months. Clearly something is not working here and Kawasaki should probably consider that if Alltop is going to succeed, he needs to do more than tweet.

Conclusion

The message here is that there are no new economics of entrepreneurship. Starting a web-based business can be done cost-effectively but that doesn't mean that the most important components are free or "cheap".

Finally, Kawasaki neglects to note the single greatest cost an entrepreneur will incur: opportunity cost. The economics of that never change.

Photo credit: Robert Scoble via Flickr.

Patricio Robles

Published 18 June, 2009 by Patricio Robles

Patricio Robles is a tech reporter at Econsultancy. Follow him on Twitter.

2381 more posts from this author

Comments (8)

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ejarmitage

Interesting post, though I would have to disagree with your comments about opportunity cost.

A recession is exactly the time when the opportunity cost of entrepreneurship is at its lowest (fewer available jobs, lower salaries). So for those who have been recently been laid off, it's an ideal moment to invest those severance packages into creating new ventures and new opportunities...

about 7 years ago

Patricio Robles

Patricio Robles, Tech Reporter at Econsultancy

ejarmitage,

That's a very good point. Something I did not consider. From my perspective, however, I've never quite been convinced of the 'recession entrepreneur'. I'm of the belief that somebody who is most likely to succeed as an entrepreneur is going to make the decision to start a venture because that's what he/she is inclined to do so anyway, not because of the state of the economy. In most cases, not all. But that's just opinion.

about 7 years ago

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Jasmine Birtles

Great post and has made me rethink some of my views on entrepreneurship and the recession. However, one thing that certainly seems cheaper in the recession, at least here in London, is office space which helps.

about 7 years ago

Patrick Bray

Patrick Bray, Senior Consultant at Stream:20

Interesting discussion points - but I believe without a shadow of doubt that some *major* forces in business will emerge in the next 2-3 years who will point to this current recession-time as the point of their conception.

about 7 years ago

Gustavo Echevarría

Gustavo Echevarría, Consultant Internet Marketing - Project Management at SIM S.A.

Good Points!!!

share with you the idea of the "crisis entrepreneur"...my question is are they really entrepreneurs or lookers for sel employment due the crisis?

They really could afford the RISK ...and survive to faiulure?..

Living in Argentina where almost the majority of entrepreneur get there just for not having jobs...I have my doubts...

Thanks

about 7 years ago

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Actonmba

The whole discussion of a recession/crisis entrepreneur is interesting, but regardless of whether why you start a business, what about the funding of the venture?  It seems like that should be another subpoint/debatable point -- is getting the seed money for your business cheaper (think gov't incentives, etc) or harder to come by in a recession?

http://actonmba.wordpress.com/2009/05/26/even-in-these-harsh-economic-times-people-with-big-ideas-can-still-make-their-dreams-come-true/

about 7 years ago

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Wisteria

its true that advertising can be incredibly easy these days with the huge social networking sites, but actually starting up the business in the first place is a major problem for a lot of people. there are however companies that help people it this by setting up the company name, making a limited company and giving financial advice. some of them even set up bank accounts for you!

here's an example;

http://www.wisteriaformations.co.uk/

almost 7 years ago

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Suze Ortoman


Basic supply and demand.  When the job market is down, you bet your britches you can find some good deals on labor.  More people are looking for opportunities in a recession than at any other time.  This time, the rules have changed.  Millions of people have lost massive amounts of wealth and it will take a lot of time and a lot of effort to replace that wealth.  Regardless of the economy, it's always a great idea to have a back up plan.  My advice is to create a money-making opportunity for yourself that will carry you through the recession and have options when the economy picks up later.  Retire wealthy to ensure you have plenty of options.

almost 7 years ago

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