Starting a business in Recession

Though we all know that Dubai has been hardly hit by recession, and I myself was affected by it. Now the question, is a recession a good time to be an entrepreneur?

From econsultancy:

Silicon Valley veteran Guy Kawasaki believes the answer to both is "yes".

In a post on Building43, he argues that there are new economics of entrepreneurship:

• Talent is free or cheap. Thanks to the ills of the recession, Kawasaki writes "If there was ever a time to get great people for free or cheap, this is it".
• Tools are free or cheap. Citing open source, Kawasaki says "You’d really have to work at it to spend a lot of money for the tools to build something these days".
• Storage, bandwidth and servers are free or cheap. Thanks to cloud hosting services, "you can get more storage, bandwidth, and servers for $1,000 a month than you’ll be able to use".
• Marketing is free or cheap. Twitter is "the single best way to market your product or service" and Facebook "is a close second". Both, of course, are free.

Having started a number of online businesses over the years and being in the midst of starting a couple of news ones during this recession, I disagree with Kawasaki. Here's why.

Talent isn't free or cheap.

There are plenty of good people who are unemployed or under-employed right now but that doesn't mean that most of them are willing and able to work for a pittance. Furthermore, from what I see in my network, the best people don't have any shortage of work.

But whether or not you can find decent worker bees at little cost is besides the point in my opinion. Trying to use "free or cheap" labor is not a good long-term strategy for attracting and retaining talent. As they say, you get what you pay for, recession or no recession. When the people you hire feel like they're being taken advantage of and aren't invested in your success, don't be surprised when they fail to deliver what you expected. And don't be surprised when they drop you like a bad habit once they find an opportunity that compensates them fairly.

Tools are cheap but that doesn't mean building a skyscraper is.

Open source solutions are great and can significantly reduce your costs. But if they're not put in the hands of competent, talented developers, they're worthless. If you give a monkey a hammer, don't expect him to build you a house; if you give a novice developer PHP and MySQL, don't expect him to build you a scalable web application.

Open source, in my opinion, is a double-edged sword for this reason. While lots of people know how to build applications that seem to work with the free tools that exist, a much smaller number know how to build applications that work at scale. You can easily find someone who can build you a database-driven website with reasonably complex functionality; it's much harder to find someone who can build a database-driven website that won't go down for the count when you get slammed with a few hundred thousand visitors in a few hours.

Storage, bandwidth and servers can be cheap but true scalability requires investment.

When Kawasaki says "you can get more storage, bandwidth, and servers for $1,000 a month than you’ll be able to use", he may be right. That's because most sites don't need $1,000 worth of storage, bandwidth and servers. For a heavily trafficked site with hefty database interaction, trust me: you're not going to throw your web application onto a "cloud" VPS and survive.

A couple of observations:

• Many of the startups that tout the advantages of cloud hosting and its benefits don't have enough usage to speak credibly. Most would get along just fine with a dedicated server or two.
• To the extent that cloud hosting convinces startups that they don't need to worry about building scalable applications, this is folly. Any startup that thinks the cloud will solve the challenge of scalability is missing the point. Caching, database query optimization and the use of high-performance/lightweight HTTP servers, for instance, result in better applications and better architectures and are things that every startup should look at.

Real marketing isn't free.

Twitter and Facebook can be great marketing tools depending on the type of business you run. But how many highly-successful and profitable startups can you name that relied solely on Twitter and Facebook to market themselves?

If you limit your marketing efforts to services that are free, you're probably missing your greatest opportunities. Kawasaki himself notes that his startup, Alltop, isn't exactly taking over the world despite the fact that he's been "evangelizing" it on Twitter for 18 months. Clearly something is not working here and Kawasaki should probably consider that if Alltop is going to succeed, he needs to do more than tweet.

Conclusion

The message here is that there are no new economics of entrepreneurship. Starting a web-based business can be done cost-effectively but that doesn't mean that the most important components are free or "cheap"

Finally, Kawasaki neglects to note the single greatest cost an entrepreneur will incur: opportunity cost. The economics of that never change.