Defining U.S. recession by the numbers
The U.S. has had consecutive quarters of a slowing economy, with the real GDP (seasonally adjusted annual rate) decreasing by 1.6% in Q1 2022, by 0.6% in Q2 2022 and 0.1 percent in Q3 2022. If we follow the traditional definition of a recession, which is two consecutive quarters of negative growth, we can agree we are in the midst of a recession.
The reasons behind the recession are a high global inflationary environment, a prolonged war between Russia and Ukraine, global supply chain shortages in semiconductor chips and dwindling advertising spending.
A Bloomberg survey of economists says the median probability of a recession over the next 12 months is 47.5%, which stood at 30% in June 2022.
While economists continue to discuss and dispute the economy’s state, businesses and consumers have started feeling the effect of an uncertain economy. From cautious spending due to inflation to VCs playing safe, it’s time for businesses to think forward, prepare, plan and use this time not just for survival but growth.
It helps to consider how the biggest tech firms are navigating and responding to the recession. Meta recently became the latest Big Tech firm to pause hiring and kickstart subsequent restructuring. This is a first for the giant. CEO Mark Zuckerberg called it an end to an era of rapid growth at the social media company.
During a Q&A session with employees, Meta CEO announced that the company would reduce budgets across most teams, even those that are growing and that individual teams will be responsible for handling headcount changes.
Meta’s decision follows other Big Tech firms, such as Apple, Google and Microsoft, who also froze hiring and started handing out pink slips to rationalize costs and maintain operating margins.
Now, let’s see what your startup should and shouldn’t do to navigate the recession and come out further ahead than before.
Assuming user needs – re-evaluate instead. Successful startups that want to stay successful through the economic downturn must fill the gap between the market’s current requirements and future needs. In an uncertain economy, it’s highly critical that you take another look at user needs as they change.
If changes in the economic environment affects user behavior, sentiment, consumption and purchasing power, are you meeting the new demands?
Spending too much – maintain a healthy runway. During healthy economic growth periods, supply is abundant and investments are available. However, during a recession, this changes. Businesses must consider securing funds before a potential downturn and budgeting to balance potential revenue and cost to maintain a sufficient runway.
With less funds to go around, now may be the time to zero in on expenses and cut back where you can. This can also be a good time for startups to set quarterly budget reviews and hiring assessments. As a savvy founder, also note that investing in efficient growth is key. Continue to put money down on key business priorities.
Not communicating – don’t leave room for assumptions. Economic downturns are challenging times for business founders/leaders and employees alike. Employees look toward their leadership to make sense of what’s happening at all times. Without proper communication, panic and uncertainty ensue.
During this time, keep your employees informed and in the loop on business decisions. Moreover, keep your customers, partners and potential investors informed of your accomplishments, progress and how your offerings will impact them positively during and after a recession.
Focusing excessively on the downturn – the customer’s success is still your North Star. Focusing on the downturn can distract your focus from running a business. Create a tight bubble around your business and, more importantly, around your customers’ success. Inflation impacts customer budgets, so startups must ensure they bring their customers solutions and fulfill their promises.
Centering yourself around your customers will also help you anticipate their challenges and build to solve them. Overall, focusing on the customer can help you attract new customers and retain ongoing ones, no small feat during a downturn.
Hitting the brakes on innovation – innovation is required. Venture partners believe that markets are won or lost based on what a startup does in a downturn. Technology leaders at startups need to ensure their company keeps prioritizing technology during the downturn or risk falling behind.
Areas such as cloud, cybersecurity and automation are hot right now, attracting active investments. As CIOs and businesses continue to put money down on those areas, enterprise tech startups lean in to meet the demand. In summary, growth opportunities remain huge amidst economic turmoil.
Now that you’re aware of the mistakes to avoid, let’s see how technology makes startups recession-proof.
Technologies such as AI/ML, the Internet of Things, Blockchain, Cloud computing, and Big Data have revolutionized businesses and the world. They have introduced low-risk and high-reward business ideas that allow people and businesses to flourish during an economic downturn, proving that technology can make your startup recession-proof. Think about Zoom during the pandemic.
Technology reconditioning is the phenomenon of meeting a user’s need at a lower cost by employing technology. With tech enablement, startups can take an area where consumers spend heavily during healthy economic times and meet the same need at a lower cost during turbulent times.
For instance, a startup can make cheaper versions of smartphones and gadgets available during a recession, knowing that customers easily switch devices every couple of years. With reconditioned products, such a startup can meet user needs in a slow economy. How can you use digital transformation or technology for reconditioning what you already offer to make it more affordable?
Solidify customer relations
Worldwide IT spending is expected to reach $4.4 trillion by the end of 2022. So if you’ve been wondering if you should cut back on your IT budget, think again because your competitors may be doubling down.
Many companies reduce their technology investments during a slowdown only to notice everyone else hasn’t and are better for it. Technology helps solidify customer relationships, personalize the customer experience and serve customers better.
How can you offer your customers better and more of what they need? That could become your anchor during turbulent times.
Instead of cutting down team size and budgets, startups must find ways to enhance internal processes so that less time and money are spent on the mundane and more on high-value processes that directly affect the bottom line.
For instance, if a company still uses a traditional method to maintain customer information, it may be holding back customer service teams from serving queries and complaints effectively. With modernized technology, customer service teams can read into each customer’s behavior and profile, proactively address issues and maintain a high level of efficiency, resulting in lower costs.
Leverage technology to improve efficiency and keep up with the competition during a recession.
Boost sales and productivity
Investing in technology to improve sales and employee productivity can directly impact your bottom line. It’s one of the best ways to retain top talent and limit turnover in an uncertain economy and the era of The Great Resignation.
Assess your sales challenges and enable better data ownership through technology, such as Enterprise Resource Planning apps, productivity tools and better data democratization. Integrate otherwise fragmented data sources to harmonize access to data across the organization, which readily improves the availability, quality and accessibility of insights for sales teams, allowing them to do a better job at ensuring your business’ success.
Disruption-proof your business
Technology resilience boosts your chances of becoming disruption-proof. Cloud solutions ensure business continuity. AI and ML ensure low error and high productivity, and the IoT makes seemingly disparate data sources coherent and leads to several use cases in industries.
When continually upgrading your technology stack, you remain competitive in a grim economic condition. Moreover, all your progress is visible to customers, investors and partners, who come to believe in you because you apparently believe in your vision enough to invest in it.
Also, technology brings scalability and agility, which are critical in times like this.
A sector that thrives no matter what is healthcare. People continue to require healthcare services no matter what happens with the economy. So, spending on healthcare services doesn’t go down as much as it might in other industries. However, this doesn’t mean consumers don’t become conservative here, too.
Consumers of healthcare services still protect their wallets when the economy is tough. But, if a startup offers health solutions that can make consumers’ lives a bit easier during a downturn, they won’t shy away from spending their dear bucks.
These tech-savvy solutions can revolve around telehealth, immunotherapy, PoC diagnostics, artificial intelligence and remote patient healthcare. Using technology, startups can lower costs and improve the accessibility of healthcare services during a slowdown.
Remote work apps
Some statistics show that by the end of 2022, 25% of all North American professionals will work remotely. Since the pandemic threw businesses into the whirlwind of remote work, people and businesses have realized the benefits that come along with it.
The trend is ongoing even as the pandemic subsides. Therefore, startups that can enable professionals to effectively work in a remote setting can become recession-proof. This list of startups could include project management solutions, knowledge-sharing platforms, productivity management tools and remote communication platforms.
In Q2 2022, enterprises continued spending on cloud infrastructure services, which reached $55 billion. The market experienced a growth of 29% when compared to the last year. Meanwhile, Google’s revenue from cloud stumbled a bit from the expected $6.41 billion to $6.28 billion in Q2 2022. So it is evident that macroeconomic changes do reflect for cloud services, as well.
However, overall, the SaaS model of services is resilient to economic downturns if a company survives through to the end. Customer retention is a critical metric for SaaS companies to measure performance, but it becomes more critical in a recession.
So to improve customer retention, SaaS businesses can release upgrades, add new features, improve software performance and address any user need to keep users paying. Finally, SaaS businesses must conduct comprehensive exit surveys to gain insight into what they can improve to keep customers.
The “firehose of money” pointed at tech startups may be drying up, but there is a huge opportunity for tech-savvy startups. Companies such as WhatsApp and Instagram were built during the 2008 recession. Technology startups and startups who are savvy in using technology to deliver their offerings will come out farther ahead than their competitors.
It’s natural for startups to tread cautiously during an economic downturn. However, being too cautious may mean missing the opportunity to innovate, reinvent and grow.
So, buckle up and get down to business!
KiwiTech is an active participant in creating the startup ecosystem in the U.S. Find out more about our startup program, technology services, and events on our website to guide you best even in these recessionary times.