How to Recession-Proof Your Startup Right Now

An economic downturn is upon us, is your startup prepared?

The pandemic shook the bedrock of our global economy. In the U.S. the government relaxed monetary policies to subvert economic tensions caused by the pandemic. Negative interest rates made fundraising easier for promising startups, and new companies saw record-high valuations. As a result, ambitious businesses experienced a promising boom.  

Today is a different story as the markets show an economic downturn is underway. The unfortunate consequences of the pandemic liquidity created economic distortions, supply change issues, inflation, and the war in Ukraine all have contributed to the current pending crisis.

If you are involved in a startup, you may think this is all doom and gloom. But there are options to get through hard economic times. The following 6-12 months will be crucial to your business. Michael Morowit, Chairperson of Sequoia Capital, offers some advice in the Sequoia perspective; he aims to remind startups to “recognize the moment, expand (their) runway, (and) become a business”.

Below are three key strategies to help you shift plans to proactively weather this downturn, giving your startup the best chance for long-term success. 

Crisis works in a super simple way. First, there will be a squeeze that will tighten all aspects of your business: less engagement, fewer customers, makes way for less money, less funding, and in addition, less talent to pull from as workers shift into more recession-proof jobs. In essence, there will be a condensing of the market. A smaller market creates a severely competitive environment where numbers matter. As a result, companies will be cutting costs and shaving down finances to create a barebones plan for getting through the crisis.

This batten-down-the-hatches approach is more challenging for new startups with limited resources, who still need to conduct essential experiments to solidify their company into a secure business platform. The goal for these startups is to pause, reflect, and shift their strategy to reach “default alive”.

The difference between a startup being “default alive” or “default dead” is based on financing and revenue. Your company has reached “default alive” when you can assume profitability while maintaining your current expenses and expected growth trajectory as a stand-alone entity. Conversely, you are in a state of default dead if you still rely on the investor’s interest as the primary driver of continuous growth. A few ways to position your startup in any phase to reach “default alive” is to evaluate your ability to raise more money, expand your runway to give you more time to secure your business, and cut costs for longevity. 

You are already invested in the economic system as a startup that satisfies a particular market need with a target audience, even within a downturn or recession. If you can secure yourself as “default alive”, you can find more assurance that you can maintain (or expand) during the downturn and open yourself up to a larger piece of the pie after the crisis is over and the market swings back.

Keep yourself alive, and your business can find more opportunities to thrive in the long run. 

You don’t have the stability or luxury of time to hire and train team members as a startup. Your runway limits your timeline, and even if you can extend it (which I highly recommend you do), time is still a precious commodity in regard to your startup goals. Hiring the right qualified talent can help you maximize your time productively and efficiently.

The hiring process with many companies can be slow and arduous and requires a lengthy onboarding process that provides new employees with the training and industry insight they need to be an asset.

This process could quickly flip your startup into “default dead” in the current economy. So instead of hiring to teach, bring onboard talent who will be super helpful from day one. As soon as they sign the contract, they will start adding value to the startup and save you time. 

Generally, you can divide skills into two categories, hard, and soft skills. Hard skills are expertise, job-related knowledge, and abilities, and soft skills are considered personal qualities that help a person thrive. For this argument, you not only want talent with exceptional hard skills but also with industry-specific soft skills. Awareness and comprehension of the specific industry of your startup, coupled with a solid set of knowledgable technical skills that can keep your project moving successfully along the runway, is a must in an economy where time is money. 

Many prominent companies have imposed widespread layoffs (including Netflix, Carvana, and Klarna), which means highly skilled talent is searching for a place to land. Now is the time to grab this opportunity to bring people on board who will be an asset to your startup.

An economic downturn is not a time to be exploring ideas on a whim. Instead, focus only on the design and experiments that will be profitable; and yes, it sounds simple. Yet, in actuality, many startups experiment with features that will not generate increased profit at the current moment. 

A wide variety of features may be cool, and they may even be what users want. Still, at this moment, when it comes to the possibility of your company going bankrupt, it is time to look at your backlog and weed out any ideas that will not generate a profit and increase business success today. 

In addition to streamlining the focus of your work, it is vital to be implementing new features for testing at a quick pace. This process is two-fold in that it will maximize your runway time and help you achieve more profitable results during that time as you figure out quickly what is working and what is not. 

That 6-12 month runway should contain 2-3 experiments per month to help move your startup from “default dead” to “default alive” throughout the downturn and into a secure position where you can acquire more opportunities when the market bounces back. 

People are aware of what is going on. Because of this, it is better to be straightforward and present the facts than to sugarcoat with hopeful promises that may not come to fruition. The way you talk about this situation matters, and by being honest, you are better able to continue trust and collaboration through these unpredictable times.

This shift includes using leadership skills to be prepared for the worst and letting your team know that you are. With budget constraints, there may be no bonuses, but the shared goal of reaching “default alive” will help everyone stay on the same page and bring confidence to the team.

It’s going to be a tight squeeze. But the best thing to do is set yourself and your business up to be as prepared as possible. That means acquiring more funding if you are able, using the planning time to pause and reflect, focus on your bottom line, and know you can come out the other side just fine, if not better, than many of your competitors.