Earlier this week, The Wall Street Journal reported that the economists now see the probability of a recession in the next 12 months close to 34%, the highest in the past five year.
Whether we will get a recession or not in the next year, most startups are ill-prepared to deal with an economic downturn as we continue the longest economic expansion in U.S. history.
We don’t expect the next recession to be of the severity of the 2008 Global Recession or the dot com implosion. However, the startups need to be prepared as any recession could cause significant disruption to funding and market adoption of new technologies. Based on our experience of watching start-ups in previous recessions, below we have summarized five key strategies that are crucial for success while going through a recession, or for that matter, even during expansion:
1. Double your runway. The most obvious step is to make sure your funding lasts twice as long as you think you need it (trust me, most entrepreneurs underestimate the runway they need, even during good times). An average recession lasts about 1.5 year though in recent decades, it has been closer to 11 months. Having a runway of at least 24 months increases the probability of next funding significantly and reduces the chance that you will run out money and close shop.
2. Create a Solid “Plan B”. Very few companies have a credible plan B in case their milestones fail to materialize and they cannot raise their planned next round. Often time they will assume they can downsize and get a bridge funding from current investors. This may work in regular times but during a recession, everyone is nervous and investors often double down on winners and cut out the losers quickly. A plan B should allow the company to pivot or sustain cash flow neutrality until it can regain take off speed. It could also include early fund raising at a more moderate valuation, technology licensing, asset sales, or merger.
3. Grab New Opportunities. Like any crisis, there is opportunity in a recession that startups can leverage. There is the potential to pick up some solid talent from companies that were ill -prepared, as well as approach them proactively to get their technology (if you are well-funded). While your customers like to save money during recession and thus theoretically are open to cost-saving offerings, rarely do they adopt such platforms. Don’t consider your business recession proof or worse counter-cyclical, as very few start-ups can thrive in recession: the famous product adoption chasm become even wider during the recession.
4. Fine Tune Your Market. A recession provides a great real-time laboratory to see how the economic factors impact the purchasing decisions. With this real-time data the entrepreneurs can quickly adjust their target market or their product offering. An initial target market of say real estate and auto may need to be changed in a recession to find segments that are less impacted, such as legal services. After the 2008 global recession, Palantir famously changed its target market from financial sector to government and intelligence services, and was able to grow fast. Being agile is even more important during the recession since you will have a limited window to gain market entry. The standards will be higher, and the sales cycles will be longer. As such, you may need to go after the easier markets first, even if it is not your final goal.
5. Stay Visible. It is important for your customers, investors and the market to hear about your company and your product, through various announcements, speaking engagements, newsletters, etc. You need to stay in the news so that your customers remember that you are a player in the market, even if you don’t have significant growth yet. When the recession finally ends and your products are ready, they will be more receptive to your pitch if they have seen you around in the past 12 months.