Many founders worry that a global recession will come after the economic slowdown the coronavirus has caused. But entrepreneurs shouldn’t worry about a potential recession because the state of the global economy does not directly impact startups on a large scale.
The real factors that determine whether a startup will succeed or fail are heavily based on their founding team, and their ability to solve a problem for a paying customer. Often achieving this product-market fit has little to do with wider macroeconomic trends. According to startup founder and VC Paul Graham,
If you want to improve your chances, you should think far more about who you can recruit as a cofounder than the state of the economy. And if you're worried about threats to the survival of your company, don't look for them in the news. Look in the mirror.
How to maximize startup advantages during downturns
1. Move quickly (while big companies reorganize)
Startups by nature are lean and agile organizations and as a result, they are much better poised than large businesses to navigate rapidly changing tides in the economy.
In contrast, large incumbents are often slow-moving behemoths, especially vulnerable during recessions. An agile startup team can exploit this period to identify the weaknesses in its larger entrenched competitors, and position themselves to maximize on any opportunities to deliver where competitors cannot.
2. Downturns create problems that entrepreneurs can solve
Recessions create a variety of new problems, and entrepreneurs are problem-solvers at heart. Technology-based businesses typically go through a period of product development and finding product-market fit while in their pre-revenue phase. Economic downturns present opportunities for founders to focus deeply on their customers and the problems the company is working to solve at scale.
For entrepreneurs who haven’t yet achieved real product-market fit for their offering, a downturn can be an ideal time to focus deeply on customer pain points. Both Apple and Microsoft were founded during the deep recessionary period of the mid-seventies.
3. Save on costs (while big companies cut their fat)
Products and services are cheaper during recessions. Smart entrepreneurs take advantage of this. Prices tend to either fall or not increase as quickly as during expansionary periods. Struggling businesses sell off assets at bargain rates, retailers and vendors slash prices to move inventory, and interest rates tend to be at their absolute lowest for borrowing money or opening new lines of credit to finance large purchases of just about anything.
Like businesses, during recessions consumers are also looking to save money on everything. So for B2C businesses, competing on price can often present a clear path to winning more business and growing.
4. Find the talent seeking opportunity (while big companies shed workers)
As unemployment rises, the number of people actively seeking new opportunities increases. More people searching means that there are more qualified, talented minds available for hire.
If your early team is looking to expand soon and is well-poised to navigate a downturn scenario and still come out the other end fine, this presents a great opportunity. Taking some time at the beginning of a recession to put a strong hiring plan in place can mean acquiring top-tier talent more easily and potentially at a bargain rate at a time when new employees will be especially appreciative of the opportunity.
In a cooler labor market where businesses are hiring less, data from the Kaufman Foundation also illustrates that more entrepreneurs will start new businesses simply because they aren’t able to find other employment.
A downturn where talented people are looking for new problems to tackle may be the perfect time to find the co-founder to complement your skill set and launch your new business with a well-balanced and experienced team.
5. All recessions end (hardy startups are the readiest to rebound)
A new bull market will eventually mean investors hungry to find opportunities. Entrepreneurs who have bootstrapped and proven themselves throughout the lean times present especially convincing business cases when they are ready to scale and seek investment.
Even during a recession, many investors may still bite - especially for angel investors, people are often looking for alternative places to allocate their money outside of public markets, so smart investors may be especially interested in funding promising early-stage ventures during downturns.
Regardless, companies that manage to achieve product-market fit during a recession are set up to take fuller advantage of growth opportunities as soon as the wider economy starts to rebound.
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