Reflections on the recession in Silicon Valley
My company closed our first large round of funding — $3.5 million — on September 12, 2008. Three days later, Lehman Brothers filed for bankruptcy. Though it is not the main point of this article, I do want to pause and note something that every good entrepreneur needs to admit: Luck is a pretty damn huge part of any success.
Like most startups, we were scared shitless, and we got phone calls from just about everyone telling us how "everything has now changed." People advised us to pinch every penny, since we would probably not raise another dollar for years to come. Others told us to begin exploring new revenue streams, since advertising would never recover.
What we came to find, however, was that the new economic climate provided some amazing benefits. I can now say, with all truthfulness, that the benefits of a shitty economy can outweigh the negatives. As we haggle our way through the Fiscal Cliff, and people begin to panic about the Series A markets, here are some of the reasons why a frozen economy can be better than a red hot one…
Hiring inexperienced people -- This was the granddaddy of them all. The gift that kept on giving. The secret sauce that kept our machine running at full blast. We hired a lot of inexperienced people. Many of them were fresh out of college, and they were entering the worst economic climate to ever cast its shadow over Silicon Valley.
People have a lot of energy when they are pursuing their first real job. And they are ready to get their butts kicked. And they follow instructions, and they don’t try to change a process until they have spent months working through it and become almost symbiotically in touch with what works and what doesn’t.
And they do things like live with their parents and take the train or BART to work for the first year, as long as you pay them enough to put off searching for a "real job" that they are likely to hate.
They are often less cynical. They don’t yet know that office politics exist. They care more about doing a good job than getting a bigger option grant, , and they value loyalty over career hopping. And they are a lot of fun to have around.
You can sometimes hire two or three of them for the price of a seasoned employee. If you invest in them, and you have the dignity to be that founder who sits alongside them and does the job with them for the first few weeks, then they will learn it very quickly.
By the time we sold our company three years later, several of these "inexperienced recent graduates" — who initially possessed not a single marketable skill — were managing large teams and holding valuable equity stakes in the company. They were so indispensible to the business, that our Corp Dev acquirers knew their names and circled them on organizational charts during diligence.
Unemployment rates for college graduates are still high. It’s a trend that can provide monumental value to any startup with hands-on founders who are ready to teach in addition to give orders. And if our company was any example, it can lead to huge paydays for the loyal, committed rookies you find.
Keeping the competition out -- When we launched our company, the competition in the "Sports 2.0" category was very stiff. Yardbarker had just raised a venture round from DFJ. SBNation had raised a venture round from Accel. Two other competitors — FanIQ and OpenSports — had also raised significant funding.
On September 15, 2008, anybody who had not raised funding was out of luck. It would be another two years until they could raise capital. For us, that meant that we knew our competition. Most of them were bigger than us at that point, so we just had to spring forward and not worry about our rearview mirror.
We told every employee who we were up against, and we kept the competition’s traffic figures on a giant scoreboard along with our own. When we passed them by, we celebrated with booze and cake.
This is an amazing position to be in. We have seen so many examples of companies that appear to win their category, only to have a hot new entrant sneak up from behind and eat their marketshare. Google/Yahoo and Facebook/MySpace/Friendster are two obvious examples, but the list can go much deeper into micro-categories.
Freezing out new competition was an amazing benefit of the recession.
Not being able to sell -- In addition to the warnings that we would not be able to raise capital, the wisest advisers also told us that there was “no way in hell anybody is gonna buy you now…” And that hangover lasted even longer than the venture market freeze.
When we first launched our business, Sarah Lacy asked us if we would ever consider “flipping for $50 million if an offer came along?” We told her that we were not interested in flipping for such a price.
That was a lie. We lied to Sarah. We were big fat lying liars. But we weren’t just lying to her, we lied to ourselves and to each other. Of course we would have considered an offer for $50 million, but that sort of offer never came along. Because nobody was going to buy a company during that time. And that was precisely when we achieved such a prospective valuation.
So we ran our game plan without the distraction of any inbound M&A interest, and our shares doubled and then quadrupled in value during the two years that followed.
Our founding team was young, and we didn’t have any money in our bank accounts. The possibility of flipping the business and putting a cool 2 million dollars in our bank accounts might have been too tempting to resist. But Lehman Brothers prevented that from being a possibility.
Much to our future delight.
[Illustration by Hallie Bateman]