This question has been in my mind a lot lately.  Anybody who reads my blog knows my outlook on the economy over the next several years in pretty bleak.  I believe and have believed for some time now that we're not just heading for a protracted recession, but a downturn that will fit the definition of a depression before it's over.  I believe the stock market declines are far from over, despite any any short to intermediate term rallies we may get.  I believe the biggest asset bubble, the bond bubble has yet to begin it's collapse and I believe we've yet to see the true economic fall out of our credit market issues.

Pretty pessimistic, right?  Yet, I left my secure position to start a new company where I don't have a secure paycheck for who knows how long.  Doesn't sound like something a pessimistic person would do, does it :)

My belief is the best opportunities to build a business occur in the down times.  Today an essay was passed onto me, Why To Start A Startup in A Bad Economy by Paul Graham, that I thought was an interesting read and echo's some of my thoughts. 

"When Microsoft and Apple were founded.

As those examples suggest, a recession may not be such a bad time to start a startup. I'm not claiming it's a particularly good time either. The truth is more boring: the state of the economy doesn't matter much either way.

If we've learned one thing from funding so many startups, it's that they succeed or fail based on the qualities of the founders. The economy has some effect, certainly, but as a predictor of success it's rounding error compared to the founders.

Which means that what matters is who you are, not when you do it. If you're the right sort of person, you'll win even in a bad economy. And if you're not, a good economy won't save you. Someone who thinks "I better not start a startup now, because the economy is so bad" is making the same mistake as the people who thought during the Bubble "all I have to do is start a startup, and I'll be rich."

Less Competition

In bad economies only the strong survive while weak companies will often flourish during booming times.  Not only will competitors begin dropping like flies but new competition will have problems getting funded or be so scared they go an hide in their bunker.  Advertising/Marketing budgets will get slashed by big competitors allowing the smaller, more innovative people to flourish.

Startup/Operational Costs Become Lower

In a sinking economy the pool of potential employees increases significantly, and this will reduce the cost of bringing in talented people, often pretty significantly.  Other types of costs such as office space will also be reduced and there is opportunities to buy things much cheaper from companies that didn't make it.

Better Business Plans

Being in a economic downturn forces you to be much more conservative and rational in your business planning.  Too many companies built in the upturns, plan around an ever increasing market opportunity and cheap capital, which leads to many unsustainable companies being built.  Think back to all the idiotic business plans that turned into well funded companies in the dot com boom and even more recently in the web 2.0 and real estate bubbles.