Starting up when the economy’s down
Entrepreneurs who launch their startups in a downturn have to get used to being thought of somewhere along the scale from “brave” to “reckless” but in truth, the state of the economy has very little impact on whether a startup will thrive. Apple and Microsoft famously began in a recession; and 16 out of the 30 Dow Jones corporations started in an economic downturn. If you have a marketable idea and the drive to go with it, you can successfully launch a new venture in a downturn. Starting in a recession has its own challenges, and its own advantages.
If you are launching a startup in a downturn, here are the five most important things you can do.
1) Think Lean. There is absolutely no slack at the moment in budgets, salaries, or credit. While it’s tempting to make a big splash at your launch, wait a little longer for the custom fit office and the army of brand consultants. It’s not for nothing that famous startups began in garages. Save wherever you can and delay spending what you have to spend as long as possible.
2) Trim the sails at home. Starting a business is stressful enough without worrying about the domestic sphere. Before you launch, look at your household budget with the same rigour that you bring to your business accounts. Prepare for economies that will allow you to survive a period of reduced income.
3) Plan to live for a while without income. Raising capital and finding credit take longer in a recession. Investors can be more circumspect when they choose new additions to their portfolio, and suppliers are looking to ensure regular cash flow so are less likely to offer generous credit terms. This means that your cash flow is likely to dry to a trickle for some time after you launch. Prepare yourself both financially and psychologically for this change. It’s easier to keep your optimism levels high if you’re certain that your business will lead to eventual success.
4) Find a market that is either recession proof or is increasing in the recession. When people and organisations feel the financial pinch they begin to defer expenditure. If you’re offering a service that people can live without, the chances are that they’ll try to, at least until they feel more confident about their long term solvency. The trick is to find a market where expenditure either can’t be delayed, or may even be brought forward in times of economic crisis. Thinking creatively about people’s substitution choices can uncover some exciting market opportunities: for example, if people are closing their gym memberships, maybe now is exactly the right time for the personal trainer app that you planned to launch.
5) Fight for every customer. There are few signs of a consumer-led recovery taking off any time soon, so the days of launching a product on an eager market are over for now. It will be a battle to persuade people to spend money on your product so ensure that you understand the terrain before you go in. Know your competitors. Know your customers’ needs. Most importantly, know how you can meet your customer’s needs far better than your competitor can.
There are certain advantages to starting in a recession and, if you can exploit these successfully, a nimble startup can thrive where larger organisations falter.
Customers, especially in the B2B sector, are looking to save every penny that they can. In good times inertia and loyalty can keep customers in a relationship with their supplier even as hungrier, cheaper competitors enter the market. But in a recession the need to save money quickly outweighs inertia, and customers are much more likely to switch suppliers if they can see the value proposition. Be prepared to displace other suppliers that are using more costly methods and you’ll soon build a market share. The same goes to some extent for the B2C sector when consumers are more receptive to value propositions expressed in economic terms.
Hiring talent in a downturn might appear easier due to high unemployment and a larger volume of incoming applications. However, the best people will always find challenging and exciting roles in the most respected companies. This means you are still going to have to work hard to identify and convince the A players. Make sure you are always networking for talent - you must constantly promote your business and the opportunities available at relevant events and meetings.
The cost of other business essentials tends to be deflated. While organising credit can be hard at times like these, some business expenditure can be cut to the bone. Office space can be found very cheaply and many landlords are offering reduced or even free introductory periods. Lawyers and accountants are competing to offer business services to new startups as their old clients falter. If you drive a hard bargain, the cost of starting your business can be very low indeed.
In summary, launching a startup in a downturn takes more patience than it does in a boom period, and you need to be absolutely certain that you’re selling something that your potential customers can’t defer until better times return. If you can start lean then not only will you be able to weather the storms of the current financial climate, you’ll find that efficiency is part of your organisational DNA, even when the good times return.
