How Startups and SMEs Can Prepare for the Looming Massive Recession

For months, financial experts around the world had been predicting an end to what has been the longest economic expansion in American history. That expansion propelled US startup activity to new heights, with near-record levels of new business creation for successive years, and cemented the US's place as the premier startup ecosystem in the world. Many believed the economists' warnings to be alarmist, at best.

The specifics of each prediction would vary, but they all seemed to point toward a consensus view that key economic indicators were flashing caution signals that had become too frequent to ignore. The only remaining question, they insisted, was when and how the next recession would begin, and how bad it would get. Then, the coronavirus (COVID-19) pandemic started to grow into an economic disruptor the likes of which we've not seen in our lifetimes – and it looks like we now have an answer to those unsettling questions.

Right now, most economists predict that we're staring at a global recession that will rival the Great Depression in its scope and severity. The economic fallout will be calamitous, and startups and small businesses will bear the brunt of the damage. Most are in the midst of taking steps to secure bridge financing and government support to stay afloat during the coronavirus-induced shutdown, but that's just step one in what's shaping up to be a long battle for survival. Here's an overview of what startups and SMEs should do to prepare their businesses for the long and painful recession that's coming next.

Delay or Discontinue Expansion Plans

For decades, conventional wisdom has held that startups and SMEs could press forward with expansion plans in times of recession, as long as they had the financial wherewithal to support it. The theory went, as rivals and competitors pared back operations, a savvy company could exploit their retreat to make long-term gains. This time around, pursuing this strategy would be akin to asking the business to commit suicide.

With the length and depth of this recession projecting to be a once-in-a-lifetime event, there aren't many startups or SMEs that will be able to grow their way out of it. Right now, the priority is and must be on preserving as much cash as possible, to gird for the extended losses that are all but certain to come. That translates into a need to call an immediate halt to ongoing or planned business expansions, in favor of building cash reserves as fast as possible.

Act to Diversify Revenue Streams

When a recession strikes, the startups and SMEs that tend to survive are the ones with the most diverse sources of revenue. The reason for that is obvious. It's because they're better able to absorb cutbacks in spending that their customers are sure to make to protect their own interests in the downturn. If the business is reliant on too few customers for the bulk of its revenue, the loss of a single large customer can become a death blow.

That's why it's vital for startups and SMEs in that position to take steps now to diversify their revenue streams to the greatest extent possible. They should start by using their sales data to create customer segments that can reveal the profile of the business's ideal customer. With that information, it becomes much easier to spend precious marketing dollars targeting customers who are likely to have a high interest in whatever products the business is selling.

It's important to remember, though, that some of the sales assumptions that work in a thriving economy don't apply during a recession. According to Iqbal Hussain, serial entrepreneur and business consultant, the trick lies in understanding the psychology of customers in a recession. He says,

"It's not that money magically disappears during the times of recession, it's just that people become more cautious about where they spend, how they spend, and on what they spend."

By understanding the motivations of their customers in a recession, startups and SMEs can still diversify their revenue streams, and even pad their bottom lines if they're able to capitalize on the dynamics at play. It does, of course, help to be in a sector that tends to be resilient in times of recession, but that's not the only path to success. In fact, history provides countless examples of startups in other sectors that thrived in times of recession – including standouts like Microsoft, Apple, and Netflix, all of whom grew out of recessions in their early days.

Prioritize Industry Partnerships

Although it may seem counterintuitive, another strategy that startups and SMEs should pursue to get through the coming recession is to prioritize building partnerships with others in their sector. They should take a more expansive view of their partnership criteria and create as many mutually beneficial industry connections as possible, in fact. In a recession, companies with strong industry connections tend to do better because they're able to turn them into flexibility that other businesses lack.

For example, by partnering with companies in their supply chain, they may be able to get more favorable payment terms in exchange for guaranteeing certain monthly order levels. It's then in the supplier's interest to help the startup or SME survive because their bottom line depends on it. By building a web of such mutually beneficial relationships, the odds of surviving a recession - no matter how deep or lengthy – increases dramatically.

Prepare for a Long Fight

By taking preparatory actions like the ones detailed here, startups and SMEs can help ensure their survival in the recession to come. Unlike recessions in the recent past, though, this one seems like it's going to require adopting the kind of long-term strategy that most entrepreneurs never would have imagined less than a month ago.

So, right after they line up bridge financing, government-backed loans, and whatever other funding sources they need to see them through the initial fallout of the coronavirus crisis, the next step is to set to work making plans to ride out what is sure to be a long financial fight for survival. If they act now, it's a fight they may find a way to win.