Startups in a Downturn

It’s about the idea that great companies can be built during bad times–an idea I’ve been talking about a lot lately on my book tour. It seems to have struck a bit of a nerve. It was the most emailed story on the site and the third most read story. This historical oddity occurred to me during the research for my book when I realized that American Research and Development invested $70,000 in the 1957 recession in Digital Equipment Corp., which turned out to be its best investment ever.

Here’s the top of the story:
Startups in a Downturn
Entrepreneurs who helped build their startups into tech stalwarts—companies like Cisco, Oracle, and Google—share lessons on how to thrive during tough times

December 1987 was no time to be raising money for a startup. Computer engineer Len Bosack was trying to attract funding for a young enterprise called Cisco Systems (CSCO). But the stock market had just crashed and the Dow Jones industrial average had plummeted 40% since October. Gun-shy venture capitalists either didn’t get the newfangled technology or deemed it too risky.

Making matters worse, Bosack was running low on the savings he had used to bootstrap the business, and competition was gaining steam. It wasn’t until this 75th meeting that he found a receptive audience. The willing financier was Donald Valentine of Sequoia Capital, a venture capital firm in Silicon Valley. On Dec. 14, two months after Black Monday, Sequoia invested $2.5 million in Cisco. “Valentine’s reasoning was pretty simple,” recalls Bosack, now CEO of telecom gear-maker XKL. “It doesn’t matter what they are. They are selling stuff in a bad market. With a little bit of capital and more experienced help they should be able to do better.”

Better is just what Cisco did. By the time of its initial share sale three years later, in February 1990—during a recession—the maker of telecom networking equipment was worth $224 million. Within a decade, Cisco Systems had become one of the world’s most valuable companies.

GREATNESS CAN EMERGE FROM A SLUMP
Today, some of America’s sharpest financiers and entrepreneurs say Cisco’s story holds a profound lesson easily forgotten amid financial turmoil: Great companies can be built during tough times. “For us, Cisco is always the company we think of when we think about bad times,” says Michael Moritz, a general partner with Sequoia Capital who was a young associate when the firm made its investment.

Cisco is just one example. In the history of technology, many other great companies either were founded during downturns or forged business models during bad times. In 1939, at the tail end of the Great Depression, two engineers started Hewlett-Packard (HPQ) in a garage in northern California. During the recession of 1957, Digital Equipment, the first computer company to challenge IBM (IBM), set up shop in a Civil War-era wool mill, sparking a high-tech boom in Massachusetts. “It makes sense to do research and development counter-cyclically,” says Tom Nicholas, associate professor in the Entrepreneurial Management Group of Harvard Business School. “Recessions can be really useful strategic opportunities.”