Very Good News for Startup Investors
Age has its advantages – in life and investing.
I’ve been in this game for a long time. Throughout the decades, some very clear patterns have emerged.
For example, we can set our watches to the “sell in May and go away” rhetoric that comes around this time each year.
It’s mostly garbage.
Or, stepping back a bit, we see the lies and false rhetoric around politics and the markets. Democrats are actually better for stocks, one side says. That’s because Republicans set the economy up for success, the other yells back.
Again… garbage.
And there’s one idea that we’ll soon hear on repeat.
This one isn’t all garbage. It’s backed by facts. But few folks actually understand the concept… or what it means for their wealth.
It’s important. So pay attention.
Time to Get Rich
Each time the American economy enters a recession (which we are very likely in right now), the money press hits us with the same old recycled articles.
Some of the best companies, they tell us, were started during a recession.
It’s true.
The list is rich and robust…
- General Electric
- Microsoft
- Netflix
- Airbnb
- Disney
- Hewlett-Packard
- Hyatt Hotels.
There are many more… but you’re smart. You get it.
From a common-sense standpoint (I know… I’m getting radical here), it’s inevitable that some good companies will come out of a recession. Out of the thousands that are launched each year, of course some will be the next unicorns.
That happens regardless of economic conditions.
But there are some very real and very good reasons to put an extra emphasis on startups when the economy is at its nadir.
This is where the average, surface-level “journalism” stops. The articles that float around every few years never bother to tell readers why a company like Airbnb can get a head start during a recession… or why Hyatt was able to fight through the headwinds.
There are three main reasons. All are very important as we fulfill our mission to get our readers the very best research and access to leading startups.
You Know This One…
The first reason is the golden thread that’s woven through all my analysis.
Interest rates.
Longtime readers shouldn’t be surprised.
But what’s a better filter of good and bad ideas than surging capital costs?
As we’ve seen over the last decade (and especially over the last two years), just about any company can keep the lights on when free cash is hidden behind every tree and the cost of capital is nearly zero.
When loans are easy and the cost is cheap… it takes a truly disastrous idea to fail.
That is, until things slow down and the cost of capital surges. As I’ve said before, we’re about to see a wave of failures… a shaking out of the weak and lousy.
When a recession hits, things are much harder. Typically, slowdowns are synonymous with high interest rates and an increase in the cost of capital.
It takes a much stronger business to make the numbers work when a loan costs 6%… than when it costs 2%. Or, worse yet, when the government is giving money away for free.
All that free money will implode in a wave of failures as economic growth withers and crawls backward.
Of course, not all startups are funded with loans. But the second reason we get stronger entrants into the market during a recession ties right into the idea.
Good Business
It simply takes a better business to make money when spending is shrinking.
As tough as it is to make things work when spending is robust and consumers are tossing money around… it’s doubly hard when they’re burying their cash and wondering whether they’ll have jobs next week.
Give me the choice of two companies – one that made a million bucks at the peak of the economy and one that made a million bucks at its trough – and I’ll take the latter every time.
Airbnb is a good example.
It was started when its founders needed some extra cash. They came up with a business model that offered two huge economic perks – their product was cheaper than the alternative and put more money in the pockets of struggling homeowners.
A company like that likely wouldn’t get dreamed up when times are artificially good.
That’s the idea that rounds us for home and takes me to my third point. The final reason we see so many strong startups during a recession is that the market gets heavy with folks with good ideas.
Now or Never
Put in far simpler terms, when unemployment surges… the unemployed get to work.
Again, Airbnb’s founders needed more cash. If they’d had secure jobs that paid fat wages, they likely wouldn’t have dared tread down the dark and scary entrepreneurial path.
It’s a crazy place.
But when the choice is to live on a slim unemployment check or try out that idea you’ve had in the back of your mind… well, there’s often not much of a choice.
So get ready for the same old news stories. You’ll be reading them soon enough.
But now you know the full story… the story that should have you itching to get into the startup portals and grabbing a stake in the best and most intriguing ideas.
The next big ones are out there.
And if my thoughts on a recession are true (I have no doubt they are)… we’re about to see an incredible wave of very strong, very profitable startups.
Let’s get ‘em!