How Startups can Survive an Economic Downturn
The world will not stop spinning when the next recession strikes. Startups will continue to be founded and they will continue to grow. Many VC’s raise their funds with a 5 - 10 year time horizon, so by the time we realize we’re in a recession there will still be a lot of capital to be allocated. Not to mention, consumers and businesses will not instantly stop paying for products and services they need. Some of the biggest names in tech today (Uber, Airbnb, Slack, Square, etc) were all started during the last recession.
Of course, that doesn’t mean the calculus behind investment decisions, consumer/business spending behavior, and labor’s motivations don’t change during an economic downturn. For startups to thrive during and after a recession, they will need to adapt strategies and operations across their businesses to accommodate for the realities of the bear market.
While it’s impossible to know exactly what the impacts of a recession would be, we can take a look at the important components of a startup’s organization, products, and strategies and begin to think about what changes could bolster a company during a slow down.
Organization and Business Planning Strategies
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Have a good arbitration clause in your contracts.
If a client tries to non-pay or extend payment terms the right arbitration clause can save you a significant amount. The right clause can force an expedited arbitration, which generally costs around $10k which is much less expensive than going to court. The term to ask you lawyer about is a “commercial rules expedited procedures.” The American Arbitration Association also has more info: https://www.adr.org (Thanks to Steve Lavine for this tip) -
Proactively try to extend contracts or user’s subscriptions.
Try offering discounts or secured rates to extend your current contracts. -
PLAN AHEAD.
Create and maintain a rainy day fund for your startup. People are generally terrible at saving and VCs push growth which means spending capital reserves quickly. Having the discipline to maintain a rainy day fund could be critical to not only surviving but having the flexibility to invest as opportunities arise in a recession.
Product Development Planning Strategies
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Focus on validating ideas.
Software development, product design, and manufacturing are expensive. Product validation testing is always important, but never more crucial than during a recession. Create a clear product road-map with specific planning to reduce waste and kill features that are not working quickly. -
Perfect your current products.
Optimize existing features and/or products instead of creating new products that will need to be market and consumer tested. -
Focus on retention, not growth.
Identify and double down on what makes the product necessary with current customers. Finding new customers requires significant capital expenditures and you can make more headway by keeping your current customer base happy and engaged. -
Reduce overhead.
Don’t pay for things that can be handled internally. Are there 3rd party services used that could be built with free time? Is there a better, less expensive solution to your legacy service? Efficiency projects, e.g. making sure server costs are as low as they can be or can we manufacture the product more cheaply. -
Products supporting pivots of the business
If your startup feels a need to make a pivot in order to gain traction leverage your existing products to support the pivot (see point no. 2)
According to a Fortune Magazine from last year, two-thirds of business economists expect a recession to hit the United States by the end of 2020 . By taking steps now to fortify your startup you can help ensure that your business will continue long past that next economic downturn.
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