“The best way to survive in economic downturn is to have a great product,” said Jerry, the founder of a successful startup. This was good advice, but it was generic and not tailored to startups.
Tim, the founder of a struggling startup, wasn’t convinced. He knew that he needed to focus on his product, but he also knew that he had to do something else if he wanted survival of startups in economic downturn.
He decided to go back to basics and focus on the three things that all startups need: a great team, a great product, and customers. By doing this, Tim was able to cut costs and improve efficiency. He also reached out to his network for help and advice.
Introduction
The last decade has been especially good for startups amidst a bull run and record highs. But, the combination of a pandemic, market slowdown, and escalation of the oil wars has brought this run to a halt. Since the 2008 recession, the Indian startup ecosystem is definitely headed for an economic downturn.
The 2022 crisis is the third major tech downturn of the internet era, following the dot-com bubble and the Great Recession.
Many experts are giving out advice to founders on survival of startups in economic downturn. While this advice is helpful, we must consider that it’s been approximately 14 years since the last major recession. Few in our industry have gone through a full economic cycle. So, it is important to remember that good advice is tailored, specific, and, more importantly, contextual. You can explore more on Startups in economic growth
As the Federal Reserve looks to combat the inflation that has hit a 40-year high, it has undone almost a decade of stimulative monetary policy. As a result, the market is going to experience a systematic re-pricing of both capital and risk. Startup valuations too are not immune to this as all financial markets are ultimately interconnected.
The monetary policies of the last decade have been quite spectacular to strategize how startups survive in economic downturn So far it had been the Federal Reserve’s policy goal to get people to take more financial risk, which would in turn hopefully stimulate the economy. However, as the monetary tide has begun to recede, major implications now exist for startup capital and valuation.
Impacts on startups in economic downturn
Cash reserves will be increasingly important to weather the storm. Startups that didn’t raise a round recently will likely have more difficulty going forward. The first three months of 2022 marked a record high for VC dealmaking among late-stage startups, but that frenzied pace has begun to slow. Now, many investors have advised founders to spend with a reserve and with the expectation that raising the next round might not be as breezy.
The mood among venture capitalists has already changed notably from 2021. The enthusiasm has waned, in part, because of broader economic factors. These are rising interest rates, inflation, and geopolitical uncertainty. They have already created a downturn in public markets. It takes longer for those factors to affect private companies. Still they are finding the ways to survival of startups in economic downturn. But the mass layoffs in growth-stage startups are one sign that it already has. Startups that had planned to IPO in 2022 have held off on doing so. Public tech companies like Uber have decided to cut down on marketing spending and hiring. Larger companies, like Meta, have already implemented hiring freezes and warned staff that cutbacks may be coming.
Impact on Indian startups
In the Indian context, the rupee is at an all-time low. This means the RBI will force to increase interest rates. So, the decline in currency is going to make inflation even worse.
Another impactful factor will be that globally, oil companies forced to hike oil prices even further. The interest rate hike by the US is going to have a definitive impact on global capital liquidity. It will lead to an increase in borrowing costs which in turn will impact business expansion and economic recovery.
A direct impact of this will effect in venture capital. And it’s becoming more difficult to access due to VC funds having less money and a global shift to fiscal contraction. The brunt of this will impact Indian startups in the following ways:
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They may force to give out more equity during rounds
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The rounds might become smaller than the historical averages
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Company valuations may get smaller
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Startups will have to be profitable from an early stage to increase their chances of getting funding
During a recession, any early-stage startup (at a Series A or prior) will find it hard to keep itself afloat. As businesses cut costs, startups may end up finding it much harder to get deals inside the door, in the face of budget cuts. This impacts the ability to raise next rounds at a scale that is large enough to support startups. With the possibility of a recession looming ahead, it is imperative for startups to start generating enough growth and to plan how startups can survive in economic downturn.It might could help them to reach a particular point of profitability.
While the incoming economic downturn may not be a cataclysmic event like the global financial crisis of 2008. There are still looms a possibility of a prolonged economic slump and higher interest rates.
For tech startups to get back on track, the IPO market, which currently is trying to wait out the volatility, needs to make a comeback. After a recent downturn in the shares of listed startups, the wait for market sentiment to improve or to reduce the offered size.
With the looming threat of a downturn, here are some golden policies that a business should adopt in times of financial crisis. It would help them keep afloat and you can go through ways by exploring the topic startups in economic growth.
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Recognizing the opportunities that brought to light in times of crisis. If you look at successful startups, such as Uber, Airbnb, and WhatsApp, you can figure out period of crisis is not only a challenge. Sometimes it’s an opportunity to open up new avenues for entrepreneurship.
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Having a clear picture of your financial standing by assessing fixed and variable expenses and actual revenue is the need of the hour. Be mindful of short-term challenges and focus on the crucial essentials needed for survival.
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If the pandemic has shown CEOs and CFOs one thing, it was to free up cash as well as resources that would keep the doors open. Even when it comes to a recession, cash liquidity is imperative for keeping operations going. So, enable best practices for prudent cash and liquidity.
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Create a narrative of change that highlights your company’s capability of developing new markets. It might mean challenging your business models to get a piece of the market share. This will help you showcase the value creation of your business to potential investors.
A reset in capital flows and valuations definitely has huge implications for startups. This means that most companies now need to recognize that the market is beyond the peak of cheap and plentiful capital.
Founders today need to accept that the valuation metrics are going to change in continuation. So its required to track your most important metrics using simple integration.The data from even a couple of months ago, no longer hold validity. Scrutinizing expenses and the basics of entrepreneurial wisdom will start to hold true again. After all, startups are not about driving change, they must also successfully respond to change. Looking at the global financial scenario today, startups need to prepare for bouts of economic turbulence to survive.
Conclusion
At the end of the day startups that make it through tough times tend to come out stronger than ever. Many of today’s hottest companies—Uber, Airbnb, Square, Stripe, Facebook—started during downturns. But for every unicorn that makes it through the downturn, hundreds more startups may get destroyed.
Author Bio: Namita Gupta is a content strategist with Axiswebart. She is also an author with a keen interest in financial topics. She has 5+ years experience of writing content with different publications. Also, she is a sports enthusiast who loves to play badminton. You can catch her on Twitter at @namita_g30
