Top 10 startup advice during an economic downturn and recession
We are officially in a bear market, with stocks down 20% from their highs. Many economists believe we will enter a recession in the coming quarters if we are not already in one. What strategies and tactics should startup CEOs employ in order to prepare for and survive a downturn? While each downturn is unique, there are some critical steps that startups can take when the economic environment deteriorates.
1.Take steps to increase the length of your runway
When a recession strikes, it becomes much more difficult to raise capital. You need to extend your runway or your “cash out date”. So, make sure you can survive on the capital you have. Spend money only to improve your product or service or to drive new sales. No more “nice to have” expenses: cut back on new initiatives, prioritizing only those with a high likelihood of success in the near term.
2.Take the initiative to embrace your best customers
A recession is an excellent time for you, as CEO, to strengthen your relationships with your most important customers. Remember that they are also concerned about the possibility of a recession. Customers always want to meet the CEO of the company from which they have purchased, so take advantage of this opportunity to hit the road, visit customers, and spend time with your salespeople. Remember that selling more to existing customers is easier and less expensive than acquiring new customers.
3. Maintain contact with your venture investors.
The years 2020 and 2021 were frenetic for venture capital, with many venture firms bidding up start-up valuations to unsustainable levels. As the economy slows, those same investors must now decide which of their portfolio companies to prioritize and support. Investors will need to set aside capital for future fund-raising rounds for portfolio companies to succeed.
4. Accept your best employees.
Recessions force employees to reconsider their career paths. If employees begin to doubt the company’s viability, they will take calls from larger firms in the market that can pay more in current income, bonuses, and benefits regardless of their equity upside. Get a head start on this. Spend time with your top performers to ensure you understand their mindset.
5. Highlight and rally around your distinct culture
Employees understand their market value and will stay with you if they are well compensated, happy, and believe they are making a difference. Concentrate on culture and communicating your company’s distinctness and value proposition. We established an equity and learning culture at Black Duck Software, an enterprise security startup.
6. Business models that provide opportunities for extra income or assistance in making ends meet can shine
Uber was an alternative for drivers who might otherwise have entered the taxi industry. The ride-hailing service assisted people in making up for lost wages during the 2008 recession and again during the Covid-19 pandemic. As people dealt with layoffs and other unfortunate circumstances, these types of marketplaces provided a lifeline.
7. Similarly, in difficult times, “freemium” revenue models are effective go-to-market strategies
Mailchimp, an email marketing automation service, saw businesses cut back on many types of marketing in 2008. What was the company’s reaction? Give away its service for free or at least up to 2,000 daily emails. Mailchimp’s “freemium” strategy—offering some of its services for free but charging more for larger deployments and added features was a relatively new concept at the time, but it’s now very popular among tech companies.
8. Long-lasting businesses offer sticky, mission-critical software.
Software is now an essential component of nearly every business and industry. However, the most powerful software products are those that customers rely on and use on a daily basis, such as a core system of record. These are products that users will not want to give up, even when times are tough. As a result, startups that offer products on a subscription basis, often through long-term, enterprise contracts, do well during difficult times.
9. Create adaptable systems that can be changed as needed
During a downturn, future growth can be difficult to predict, so businesses must build systems that are adaptable to changing demand rather than locking themselves into costs they cannot change. This principle applies to a wide range of costs, including cloud computing and marketing and sales expenses.
10. Difficult times can inspire creativity.
Regardless of the stress that startups may face during a downturn, learning to optimize costs and increase operational efficiencies can be a beneficial exercise for businesses. Companies that can bring their employees together and get through difficult times will be well-positioned for future success.