Entrepreneurship

How Startups Should Handle the Impending Recession

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It’s no news that tough times are coming for startups with the looming recession. This will be the third major tech slump following the dot-com bubble and the Great Recession. 

Early in June, the S&P 500 hit its lowest point in more than a year, tumbling 4%. It fell below the 20% threshold to be considered a bear market. Inflation hit a 40-year high in the U.S. this spring, driving an increase of 0.5% in interest rates.

Historically, in the past 75 years, whenever inflation increased by 4% and the unemployment rate dipped below 5%, the U.S. economy experienced a recession within two years. In May, inflation clocked over 8%, double the threshold.

Each company faces a unique set of challenges in a recession, defined as two consecutive quarters of negative economic growth caused by economic shocks, changes in economic expectations and a financial panic or any combination of the three.

Most startups suffer during a recession as demand plunges, giving rise to an uncertain future. However, research shows during the recessions of 1980,1990 and 2000, 17% of 4,700 studied public companies went under and 9% of the companies didn’t just survive the recession but thrived.

The difference between startups that go under and those that rise from recession is how they prepare for it. So, let’s get you prepared.

Related Reading: What Does Strategic Resilience Look Like for Startups in 2022

Assess Where You Stand and With What

Some startups have more favorable balance sheets to survive an economic downturn than others. Some startups also manage to raise funds in hard times. So, before charting the right course of action for your startup, assess where you stand and how many resources you have available.

  • How much does your business have available in cash?
  • Do you already have the product-market fit?
  • How healthy does your growth strategy look for a recession?
  • Have you assessed and prioritized engineering projects and marketing campaigns?
  • What is your competition up to?

Answer these questions to learn more about your status quo.

To Prioritize Or to Go Full-throttle?

The natural impulse in a recession is to postpone innovation, reduce spending on marketing, research and development, and employee training, freeze hiring and lay off employees. However, a recession offers a unique opportunity for startups to invest in their future judiciously.

If a company has a decent runway to do so and believes in its vision, experts advise going full-throttle on promising ideas. This HBR article points out that the dot-com bust separated the wheat from the chaff, leading to numerous delistings and bankruptcies while bringing out winners in the form of Facebook, Apple, Netflix, Amazon, Google, Microsoft and Nvidia.

This article is a promising report on how Samsung managed to grow its share by 4 percent during the economic meltdown of 2009 and how people were still buying technology back then.

Therefore, instead of cutting costs, startups must be deliberate and strategic by paying attention to how customers are behaving in this slump. Even if customer behavior or expectations change, startups are uniquely positioned to course-correct faster than an established organization that’s too set in its ways.

If your competitors are playing defensive, should you be attacking consistently on a few priorities and standing out from the crowd?

Do You Need to Cut Costs?

Companies with short-term access to resources face the biggest risk in an economic downturn. For such startups, it’s a good idea to cut costs across R&D, sales and products. It’s critical to focus on efficiency and to communicate that with employees.

Companies deep in debt face the most pronounced vulnerabilities during a recession. A 2017 study found that declining housing prices led to low customer demand, driving businesses to close and higher unemployment. The research found that the effect was reflected highly in companies with high debt.

Companies in deep debt face a cash strap during a recession, forcing them to cut costs aggressively, jeopardize growth and hamper any chance of survival. A report by McKinsey shows that resilient companies during the 2009 recession had cleaned up their balance sheets in time to be acquisitive moving forward. They reduced debt by over $1 for every dollar of total capital on their balance sheets, while non-resilient companies added over $3 in debt.

Layoffs, however, may not be feasible to cut down costs, as they render hiring and training expenses a waste. A better strategy involves cutting costs by improving operational productivity and efficiency so that your best talent stays.

However, if a startup has a runway to function for a couple of years, it’s best to acquire resources during a downturn when other companies are cutting back. The most important resource- human talent- is more readily available during a recession than in a time of expansion.

This could also be an opportunity to acquire companies and buy assets. For instance, from 2008 to 2010, tech giants rode the recession in a fascinating manner. Intel’s CEO at the time, Paul Otellini, confessed that during a recession, Intel invests in R&D, looks for talent to fill future needs and accelerates plans for expansion.

As you read, Microsoft has doubled its employees’ bonus pool and is planning for expansion. Google is forging ahead with the Google Village expansion in downtown San Jose to employ 25,000 engineers.

While startups are nowhere near the big tech, it makes sense to look at and learn from how the big players are being sharp and smart about riding the recession to emerge as winners on the other side.

Related Reading: Is Your Technology Stack Resilient?

What About Digital Transformation?

A steep decline in digital stocks doesn’t mean bad news for digital strategy. Every company is a digital company today and in the future. The pandemic forced every company lagging in rolling out digital transformation projects to hurry up.

A well-crafted digital strategy offers several benefits:

  • Improved visibility of resources
  • Enhanced resource management
  • Better organizational flexibility
  • Higher organizational agility
  • Cost reduction
  • Hiccup-free supply chain management
  • Exceptional customer experience
  • Improved internal productivity and employee engagement
  • Faster product development and go-to-market
  • Superior human resource planning

In a nutshell, a digital strategy serves an organization from all angles. This 360-degree advantage is not to be lost during a recession. Instead, this might be the right time to double down on digital transformation and handle the challenges of the market and opportunities presented effectively.

Research shows that the U.S. cities hardest hit between 2007-2015 saw greater demand for high-order skills, including digital skills. One reason is that employers could be choosy in a market where organizations were laying off employees.

Economists believe that organizations also invested in technology during the economic turmoil because of the lower opportunity cost. When an economy is healthy, every company wants to produce what it produces as demand is high. However, when an economy is low and demand goes down, companies can revert resources toward innovative projects, of course, if they can.

Therefore, adopting new technologies costs less in a downturn.

Furthermore, technologies that aid in understanding your own business- inefficiencies, gaps in analysis, cost leakages- or your customer and the market can be helpful during a downturn.

Can you self-fund digital transformation projects that can lead to short-term gains?

Steps for Robustness and Resilience

Distribute decision-making

A company’s organizational structure affects how decisions are made and perceived by everyone. In centralized hierarchies, the executives have a better picture of the entire organization and personal incentives that align with business goals. 

However, decentralized startups can weather storms such as a recession better because the value of local information increases as decisions are delegated further down, as per a 2017 study. And, the benefits of a decentralized firm faded as economic conditions improved, the study found.

An HBR article highlights how decentralization is always helpful when it’s important to have responsiveness. And, when reliability, efficiency and perennity are critical, it makes sense to centralize the organizational structure.

Strengthen trust internally

A company with low trust in the leadership and business strategy tanks on a good day. In a recession, a company’s responsiveness and resilience are highly tested. Furthermore, when people get paranoid about their future, they contribute less and make plans to survive individually.

Leaders should step up in dire times and strengthen people’s trust in themselves and their policies. A people-first mindset can help employees feel safe enough to continue contributing to a larger good.

Invest in diverse talent

One of the best ways to stay employed during a period of recession is to arm yourselves with a diverse set of skills. And one of the best ways to keep an organization afloat is to hire multi-faceted individuals who can contribute in more than one way.

Strong leaders allow their people to invest in learning a variety of skills, knowing that diverse talent makes all the difference in trying times.

Diversify revenue streams

A recession exists for your customers, too. Therefore, you want to ensure that no buyer represents over 10% of your business. If they do, you must diversify.

Assess if you want to broaden into other markets, onboard more customers or ramp up marketing for the next year. Find ways to forge new income streams that prevent your accounts from drying out.

Keep a low inventory

If you are into manufacturing or retail, take a walk through the warehouse. The cash shelved in there would be hard to liquidate in a recession. Learn more about how to run a lean inventory.

Look at historical data about your business and customer to know how much inventory you need to meet demand. Then maintain accordingly.

Learn from the Past to Navigate the Recession

This piece is sprinkled with references to the previous recessions and their lessons, but here’s the gist. Not all small businesses may have what it takes to survive an economic downturn. But, for a company with a robust business model, a recession brings opportunities.

As bigger organizations lay off employees, reign in the best ones. Let this trying time help you grow and learn a thing or two. Previous economic recessions have bred unicorns, such as Uber, WhatsApp, Groupon, Slack, Airbnb, Instagram, Venmo and many more.

Here are the signs your startup is poised to grow during a recession-

  • You build and sell something that stands at the core of your customer’s business. 
  • Your company stands on firm ground, and your product/service is well-tested.
  • You bring technology to your customer’s pain points and help relieve critical pain for them.
  • Your business has a provable ROI that customers can see and experience.
  • You believe in your product and idea and have the necessary resources to see it through.
  • You believe in your product and can make the necessary changes to your business to reflect what’s coming.

A recession is always followed by a long period of expansion and growth. So, with the right strategy by your side, keep your eyes on growth and buckle up for the ride.
To learn more, download our latest white paper- Building a Resilient Company in the New Normal.


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