Recession may be good time for startups

June 22, 2009 7:14:23 PM PDT
What do Hyatt, Microsoft, Fedex and Burger King all have in common? They are all major corporations that started during recessions. With unemployment so high, you might be surprised to hear that many people think this is a great time for startups.

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Launch Silicon Valley is an annual event that invites 30 entrepreneurs to get their name out in front of hundreds of venture capitalists and corporate executives.

"They get a terrific amount of buzz and interest from people who they would otherwise struggle to meet," says Chris Gill, president of the Silicon Valley Association of Startup Entrepreneurs (SVASE), the group that hosts the annual Launch event.

Gill says the success of this year's event highlights how little tech companies are getting big attention in this otherwise dismal economy.

"We're certainly seeing a lot more activity," says Gill. "Since the start of the year, membership has increased substantially."

Whether it is out of work techies following a dream or someone who is creating something in their spare time, it has never been cheaper to start a tech company.

"What would have cost you a quarter of a million, maybe a million dollars two or three years ago, now costs $25,000," says Gill.

"I had never really even thought about starting a Web site. I really didn't even know if I could do it," says John Tayman who took $10,000 and started Motormouths.com in his spare time. "The site, Motormouths, is essentially a Rotten Tomatoes for car reviews."

The site summarizes auto reviews and ranks cars based on those reviews.

To build it, Tayman used free software available online and outsourced some of the work to freelancers available on the Web.

"There are people everywhere that know how to do this, that are willing to help you, and that you have access to," says Tayman.

By the time the site launched early this year, Tayman had hired a staff of 20 people in five different countries to piece together Motormouths.com.

"They were scattered all over the globe," says Tayman. "I used subcontractors in India and Russia. The very first time that I met the people that literally had the most to do with building the site was at our launch party."

Motormouths is exactly the kind of success story venture capitalists like Paul Graham are banking on -- big ideas with small budgets.

"Investors are still investing, the valuations are lower, but they are still writing checks because they don't want to miss the next Google, right? They cannot afford to not invest," says Graham.

Mountain View-based Y-Combinator invests small amounts of money in a large number of startups. The average investment is around $20,000. In exchange, it gets a stake in the company.

"Every six months we have applications and we go through them all, invite people to meet us, and decide whether to fund them or not after a 10-minute conversation," explains Graham.

Y-Combinator has seen some success. They have funded sites like Reddit, Scribd and Loopt.

So what do investors want?

"I think investors are looking for the same kinds of things generally... what they are looking for is that you've made something that people really like," says Graham.

Graham says new startups are emerging every day despite the downturn in the economy.

"Don't be afraid of the recession," he says. "It's still possible to start a startup."

And nowhere are more ideas emerging than in Silicon Valley.

"If you did a topographical map of where's it all happening -- if you look at a world basis -- Silicon Valley sits out hugely above everything else," says Gill.

One big area of growth? Apple iPhone applications. Since Apple opened up its programming codes, more than one billion applications have been sold; many created by small startups.

Written and produced by Ken Miguel.

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