Schafer: Can a downturn actually be the right time to start a business?

Venture capitalist and entrepreneur Rob Weber’s list of successful businesses started in recent economic downturns has a few names you’ve likely heard of, including Jamf Holding Corp., the Minneapolis software firm that just completed its half-billion-dollar initial public offering.

He was making a couple of points by publishing his list on the website of his firm, Great North Labs, including showing entrepreneurs in this tough pandemic year that it’s possible to make it through and even thrive.

Asked if this suggests that it’s actually better to get a business going in a slump, he responded, “I actually think it is.”

An economy works in unpredictable cycles, Weber noted. “If you start building, and start setting your overhead and operating costs at the bottom, you’re not likely to get surprised,” he said.

As he went back to look at what he called “breakout companies” in the region, he found as many that got started in a recession or shortly thereafter as otherwise, including venture capital-funded Code42 Software and Sport Ngin, since acquired.

Recessions do seem to create more incentive for potential customers to look for cheaper or more efficient ways to do things. Often, they turn to new products created by upstarts. After all, one of the things that characterizes classically “disruptive innovations” is not that they are a lot better, exactly, but cheaper or simpler to use.

Part of what makes Weber so much fun to interview is his boundless enthusiasm for entrepreneurship. This week he described an emerging Wisconsin company called Fiveable that created a clever way for high school kids to be tutored and study together online for advanced placement classes. Another company he mentioned quickly made a sharp turn into a new market that only really emerged with the COVID-19 pandemic this spring.

Yet the one big thing that Weber talked about is simply resilience, which is difficult to teach to a school kid or an entrepreneur. But one sign of it is the ability to keep a company going without much money.

It’s worth noting that Rob Weber’s list of successful companies that started in a broad economic slowdown is his own on it, most recently known as NativeX, cofounded and run with his brother Ryan Weber.

The closest to failing they came was when it was unprofitable and down to its last $100,000 in the bank. Rob Weber can remember how he felt — including not sleeping for days.

He suspects pretty much all successful firms have a version of this near-death experience. Startups usually need money from outside investors to make it through building out a product and ramping up with early customers. Capital can dry up, Weber said, usually even after broad economic downturns and the economy has started to grow again.

That’s why he thinks the harshest conditions of the current winter season for startups may not arrive until well into next year.

Weber suggested touching base with founders and CEOs who managed this journey well, including Scott Burns of St. Paul-based GovDelivery, a company on his research list.

And Burns can’t quite accept Weber’s thesis that it’s better to start in a downturn. It’s probably true what doesn’t kill you makes you stronger, but first you have to survive.

GovDelivery was acquired and merged with a Denver firm also controlled by Vista Equity Partners nearly four years ago, the end of a 17-year story that actually started in the go-go years of the dot-com boom.

Burns recalls quitting his job and forging ahead with GovDelivery full time within days of the early 2000 peak of the Nasdaq stock market index, the high-water mark of that era. They soon realized they’d missed the boom.

Surviving meant spending as little cash as possible, Burns said, including giving up future revenue for work done on its website, recruiting employees with the promise to pay catch up salaries and so on.

He remembers going into this venture “as a way of getting rich fast, riding a wave, all the wrong reasons.” Although the quick riches didn’t follow, the hard work turned out to be very rewarding.

It’s the difference between an athlete who plays only to win and a competitor playing for the love of the sport, he said. As an entrepreneur and business leader, he came to love playing his sport.

Burns today is the co-founder and CEO of software firm Structural, Inc., based in St. Paul, and he serves as a member of the Star Tribune Media Co. board of directors. (He’s also an owner of an office building with my spouse.)

At Structural, he’s approaching this recession differently than he did during the previous ones at GovDelivery. For one thing, Structural’s software product makes it easier to collaborate across an organization. Working at home in the pandemic seems to have only increased the need Structural was created to meet.

His bigger point is that he’s now trying to remind himself to not just be frugal but instead remain focused on long-term goals, including not making expense cuts that would make it harder to jump on the good opportunities as they arise along the way. When CEO of GovDelivery during trying times, he said, “we were so beat up we lost our ability to move fast when the opportunities did arrive.”

He also understands that what he called the “lucky bullet theory” of entrepreneurship seems to apply to their story at GovDelivery. That is, his firm hit the bull’s-eye, so outsiders concluded that it must have been the result of very skillful aim. The reality is a lot of companies fired at the target and his happened to hit it.

Bad luck might have befallen some of the entrepreneurs who missed.

It’s another way of suggesting that carefully husbanding cash and being savvy about the best opportunities in the market might not be enough. Businesses led by smart and hardworking people will fail this recession.

Some already have.

 

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