When a startup is founded, success is the ultimate goal. However, with the volatility of today’s economy and the instability of world events comes the risk that goes beyond the development of products, services, or businesses. There is a wide range of external factors and decisions that are naturally out of our control. Your finances are largely in your hands, but the economy as a whole is not, nor are factors such as inflation. The repercussions of these outside factors can send your new venture down a spiral if you do not plan ahead for such contingencies. Startups are particularly at risk from downturns because, unlike established companies, they are often reliant on investors, operate on a shoestring budget, and rarely turn a profit in early days. With the current state of the world, the menace of recession has been looming just around the corner for quite some time, making a strong plan for your startup all the more necessary.
What is a Recession?
A recession has been threatening the US economy for quite a while. Warning signs such as increased inflation, flagging gross domestic product, large interest rate hikes, and volatile stock markets abound. But what exactly is a recession? By most definitions, two consecutive decreases in GDP constitute a recession. However, it is generally accepted that the National Bureau of Economic Research technically declares recessions. According to some economists and a few of the less stringent general definitions of a recession, we were in a recession as of the summer of 2022. However, this is very debatable, because the unemployment rate has shrunk, and while there are changes in shopping habits, consumer spending was holding steady as of June/July 2022. However, if we’re not in one at the moment, the markers indicate we are likely to face one in the near future.
How did we get here?
There are several factors that lead to our current recession or near-recession economy, and we have in fact identified that there have been several smaller recessions in recent memory, notably a two-month recession period due to Covid in 2020. Covid, inflation rates, money printing, subsidies, the FED raising interest rates, and now challenges to worldwide supply chains due to the conflict in Ukraine, all are factors that have contributed to what could potentially become a global recession, not just the US.
How Does a Recession Affect Startups?
There are numerous ways in which a Startup can be affected by a recession – simply put, newer ventures without excess capital are more likely to succumb to financial pressure during a recession. Some of the concerns include:
- Investor Risk –investors will put less money into risky assets. Investing in startups is extremely risky, so it will be harder to raise funds at every step of the way.
- Income – It will be harder to generate revenue in certain niches if overall spending in the economy drops.
- Money Management – Less investment and less income means that you will have to be diligent with your spending. Overhead will become scrutinized.
- Costs –Increased material costs (inflation)
- Banks – Banks are less likely to lend money to less established organizations during a recession.
These are just some of the more obvious challenges of a recession.
What Can You Do?
Every business is different, and what drives success for some does not always extend to others. While a great deal depends on your goals and the nature of your business, there are a few pieces of advice that apply nearly universally to startups in order to avoid faltering during a recession.
- Watch for signs – The first step to preparedness is to recognize the signs of a recession so that you are able to react and implement your contingencies in a timely manner. Most of these signs have been covered above:
- Gross Domestic Product diminishes for 2 or more consecutive quarters
- Consumer spending and confidence falls
- Unemployment rises
- Credit card and loan debt rises
- Increased media coverage of recession topics
- Factory slow-downs/layoffs
- Ensure your business has liquidity –Cans is king. Liquidity means that your venture’s short-term liabilities are covered. Recessions can be relatively short, or lengthy. The Great Recession of 2008 lasted approximately 18 months. You must ensure you have a cushion of savings that can keep you afloat in such a worst-case scenario. Make sure this plan includes any necessary draws for living expenses for yourself and your family (as the founder).
- Reduce outgoing cash flow – There are numerous ways an organization can ‘trim the fat’ in preparation for or to survive a recession. Take care not to trim too much, if it has the potential to cause long-term damage.
- Review monthly expenses and trim what you can – eliminate or seek better cell phone plans, reduce office supply expenditures, and change internet plans. (Everything but the premium coffee. You’re going to need that.)
- Trim payroll hours (be careful not to trim too much, as a reputation for being a fair-weather employer can be harmful)
- Cancel unnecessary subscriptions
- Explore better rates from suppliers, or seek new ones
- Put off expensive purchases
- Seek additional cash flow/revenue – This can mean a number of things, such as:
- Seek out new investors (can be a challenge during a recession)
- Apply for funding programs such as the Flatirons Fund. The Flatirons Fund offers investment in the form of development, design, and product management services, to help keep startup costs low.
- Secure longer-term customer deals for less money
- Introduce new selling strategies
- Online/Remote Investment – One key outcome that came from Covid and the economic hardships that resulted was an increased focus on remote work and the tools that came with it. Online sales and distribution also grew exponentially. Going “digital”, ie selling online and working remotely offers two key benefits
- The ability to sell everywhere, potentially increasing revenue
- Cutting costs, as cloud applications, remote collaboration tools, and cloud storage is typically relatively cheap – not to mention that if considering trimming payroll, employees might be willing to trade a few hours of work to avoid a commute.
- Plan for stress – Even in the best of times, a new startup venture can be stressful. During a recession, financial issues can exacerbate the daily stresses felt by yourself, your employees, and your family. A recession can last a long time, and it is important to keep health and sanity for the duration. Make sure your plan covers the long haul, potentially 2 to 3 years, and commit to working a reasonable schedule and taking care of yourself along the way.
Truth is, you can’t recession “proof” anything, but by taking preventive measures you can increase the likelihood of making it through. Hope you’re on it; if not – ready, set, go!