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Reuters/Sivaram V
BEHIND EVERY CLOSED DOOR

Lessons from starting a business during an economic downturn

Frederic Kerrest
By Frederic Kerrest

Co-founder, Okta

While European leaders have reached a deal on the Greek debt crisis, the drama isn’t over yet for tens of thousands of Greek entrepreneurs. Economic turmoil is a scary time: tight cash controls make basic operations difficult, fundraising is nearly impossible and the best talent is unlikely to leave their stable jobs to take a risk on you. The Greek have the highest fear of failure in the EU, but “survival mode” can be one of the best times to start a business. In fact, between 2013 and 2014, Greece jumped 111 places in the World Bank’s ease of starting a business index.

I built my first startup in Argentina during the economic crisis-turned-revolution in 2001, and my co-founder and I started Okta in the depths of the US recession in 2009. Every struggle opens an opportunity for growth. Here are five reasons why an economic downturn can be the right time to start a business:

1. Survival instincts make you strong

Starting a company during a period of economic trouble forces you to build strong business practices that you will appreciate in the long term. When capital is difficult to come by, you are forced to focus on mission-critical operations and be frugal. When money is cheap, luxurious offices with private baristas and free gourmet lunches are too frequently a top priority for new company founders. While Okta offers free catered lunches three times per week to promote cross-group collaboration, a couple of nice ping pong tables and good beers on tap, we didn’t implement any nice-to-haves until we could afford them. We are smarter with our money as a result of our early days.

2. Funding isn’t the end-all, be-all

During America’s 2007-2009 recession, there wasn’t much venture money to go around. When we started Okta in 2009, venture funding was at a low of $16.1 billion, down from $31 billion in 2006. While we were very fortunate to close a seed financing round lead by Andreessen Horowitz in mid-2009, (followed by a Series A round in early 2010), the fundraising environment was tough. Few companies were getting funding and investors were incredibly reticent to invest while the overall economy lagged. Learning to raise money is an exercise in convincing people to fund you—but it doesn’t actually teach you much about building and growing a sustainable company. For many, the hardest lessons come after the fundraising period. While you’re likely to need funding to build your high-growth business, it is only one of many tools in the shed you will need to build a successful company.

3. Incubation can focus on customer success

Excellent technology takes time to build and an economic downturn can be a good period to incubate your idea. Why not focus on the success of a small set of customers? In 2010, Okta had only ten customers on board. We spent the entire year focused on their success, iterating and discovering what they needed and how we could best deliver. By 2011, we had 50 customers; today we have over 2,000. Use a down period to nail down the core product features, get your architecture right and make sure your first customers see value in the product. The success of your early customers is crucial to your long-term success. When the economy gets going again and pockets are full you’ll have a proven product ready to go and customers to speak on your behalf.

4. The innovation vacuum is your friend

When a country is going through an economic downturn, innovation is hard to come by: businesses often hunker down, play it safe and wait for the storm to pass. The vacuum of innovation is the perfect time to bring new ideas to market, since it means that there is significantly less competition in the market for your idea. When we started Okta, IT leaders were (and frankly still are) deeply invested in their existing, onsite software implementations. CIOs five years ago were starting to get comfortable with moving their sales force automation software to the cloud, but the idea behind Okta—of moving identity management to the cloud—was a non-starter. Because of the climate, few other businesses were willing to innovate in this area, allowing Okta to create, own and lead the market. The innovation vacuum allowed us the time to build the best product and architecture with little competition. By the time the market caught up, we were well ahead of the pack.

5. There’s never really a “right time” to start a business

Starting a business is hard under any set of circumstances. If you’re building a business for the long-term, at some point, it is likely that you’ll deal with a difficult economy, a hard funding climate or other financial circumstances that are out of your control. Learning to mitigate these externalities during hard times will help set up you and your company for the future—and the sooner you learn, the better.

Not every company is going to make it and I don’t minimize how difficult an economic downturn is—I experienced firsthand how hard it is to run a business during a financial collapse in Argentina. But there is plenty of evidence to show that great companies can be built in trying times, and I wish the best of luck to entrepreneurs making their way.