5 Ways Startups Can Prepare for a Recession

5 Ways Startups Can Prepare for a Recession

Startups face unique challenges during an economic downturn. They are generally not yet profitable and therefore depend on external funding. They are therefore particularly exposed when macroeconomic conditions change. To weather a recession, startup CEOs need to hit the road and talk to customers. They must also focus on preserving their corporate culture and retaining top employees. And they should do whatever they can to expand their leads, including taking out a line of credit.

With stocks down 20% from their highs, we are officially in a bear market. Many economists predict that we will enter a recession in the next few quarters if we are not already there. What strategies and tactics should startup CEOs use to prepare for and survive a recession?

I’ve spent the past three decades in the software industry, including three terms as CEO as well as serving on the board of 10 private companies and as an advisor to many more. I have led or advised companies during the dot com bubble burst, the 2008 financial crisis and the Covid recession. While every downturn is different, in my experience there are some critical steps startups need to take when the economic environment deteriorates.

Take steps to extend your trail. Now.

When a recession hits, it becomes much more difficult to raise capital. You need to extend your track or your “withdrawal date”, so plan to survive with the capital you have. Only spend money to improve your product or service or to generate new sales. No more “nice-to-have” expenses: cut back on new initiatives, prioritizing only those that have a chance of short-term success.

In a recession, “cash is king”, so you need to make sure you have enough to move on to the eventual expansion. Take out a line of credit to increase your equity. Interest rates are still reasonable and cheaper than new equity financing, even with rising rates.

Proactively welcome your best customers.

A recession is a perfect opportunity for you as CEO to strengthen your relationships with your most important and important customers. Don’t forget that they also feel the threat of a recession. Customers always want to meet the CEO of the company they bought from, so this is an opportunity for you to hit the road, visit customers, and hang out with your salespeople. If you can’t have an in-person meeting, go to Zoom. If you’re uncomfortable selling, move on. I recently spoke to a Founder/CEO with a technical background who told me he “learned to enjoy sales,” even though he was uncomfortable selling at first. If you’ve always thought your time was better spent on products, it’s time to reconsider: in a downturn, your best use of time is talking to customers and making sales.

Remember that it is easier and cheaper to sell more to existing customers than to attract new customers. This is especially true during a recession, when everyone re-examines all expenses. If you’re in a B2B business, visiting customers also gives you real insight into customer satisfaction and churn risk. If you run a B2C business, invest in rewards programs and other initiatives to make sure your best customers feel appreciated. The risk of churn increases during recessions as companies prioritize spending and abandon new initiatives. High churn rates have a direct impact on company valuations. As CEO, you are in a unique position to lead by example and your employees will recognize your efforts.

Stay close to your venture capitalists.

2020 and 2021 have been frothy years for venture capital and many venture capital firms have increased start-up valuations to unsustainable levels. These same investors must now decide which companies in their portfolio to prioritize and support as the economy slows. Investors will need to set aside capital for upcoming fundraisings of portfolio companies in order to complete them.

In 2022, down rounds are becoming more and more common. As a CEO, admitting that your company has a lower valuation can be very difficult. It’s important that you communicate with your venture capitalists often to make sure they see your long-term potential.

Embrace your best employees.

Recessions force employees to rethink their career choices. If employees begin to doubt the viability of the company, they will accept calls from large companies in the market – no matter how much their equity rises – who can pay more in current income, bonuses and benefits.

Get ahead. Spend time with your best people, making sure you understand their mindset. Employees always assume that their equity stake is based on the last funding cycle, so lower cycles create employee angst. The loss of top talent will have a very negative impact on your business. Managing and maintaining your momentum is key to both retaining your best talent and recruiting new talent.

Several times in my career, I got ahead of this problem by offering extra stock option awards to top employees to make sure they wouldn’t even answer recruiting calls. That works. It’s much easier to get ahead of retaining top talent than trying to counteroffer once your employees are considering other options.

Focus and unite around your unique culture.

In my experience as CEO, culture was by far the most important determinant of employee retention. Employees know their market value and most stay with you if they are paid and happy and feel they are making a difference. Focus on culture and communicate your company’s uniqueness and value proposition.

At Black Duck Software, an enterprise security startup, we’ve created a culture of fairness and learning. Each employee was a shareholder and considered the company as his own. We created learning and training opportunities and employees felt they continued to learn and grow as part of the company.

A unique and identifiable culture is essential to motivate your entire team ready to fight in adversity. It may seem counter-intuitive to both cut expenses and focus on culture. This is possible because funding unique cultural events is not expensive. It’s really the thought behind gatherings that matters and impacts employee morale. At Black Duck, we held a Star Wars lego building contest for our software developers. The event was hugely popular as developers got to publicly display their creativity and have fun, and it didn’t cost a lot.

Every company’s culture is different, but now is the time to double it. A good culture will help retain talent and ensure that you are able to weather the tough times.

. . .

Recessions are a natural part of business cycles and businesses of all sizes must weather them or wither away. Startups face a unique challenge because until they become profitable, they rely on outside capital to fund their growth and evolution to maturity. To succeed and come out even stronger, save money and pay close attention to your customers, investors, employees and culture.

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