5 Ways Startups Can Prepare for a Recession

Startups face unique challenges during an economic recession. They are usually not yet profitable and therefore rely on external sources of finance – and are therefore particularly exposed when macroeconomic conditions change. To get through the recession, startup CEOs need to hit the road and talk to customers. They should also focus on maintaining their company culture and retaining top employees. And they should do whatever they can to stretch their bands — including getting a line of credit.

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

I’ve spent the past three decades in the software industry, including three stints as a CEO, as well as on the board of directors of 10 private companies and as a consultant to many others. I have led or advised companies through the bursting of the dotcom bubble, the 2008 financial crisis and the covid recession. While every recession is different, in my experience there are some basic steps that startups should take when the economic environment worsens.

Take action to expand your band. now.

When a recession hits, it becomes much harder to raise capital. You will need to extend your runway or “cash-out date”, so plan to survive with the capital you have. Just spend money to improve your product or service or generate new sales. No more “nice” costs: reduce new initiatives, and prioritize only those with the best chance of short-term success.

During a recession, “cash is king,” so you need to make sure you have enough to see you through the final expansion. Use a line of credit to increase your capital. Interest rates are still reasonable and cheaper than new equity investments, even with rising rates.

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Proactively embrace your best customers.

A recession is a great opportunity for you as a CEO to strengthen your relationships with your biggest and most important customers. Remember that they also feel the threat of 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 spend time with your salespeople. If you can’t make an in-person meeting, meet on Zoom. If you’re not comfortable with the sale, skip it. I recently spoke with a founder/CEO with a technical background who told me he “learned to appreciate sales” even though he initially resented sales. If you historically think that time is best spent on product, it’s time to reconsider: in a recession, your best use of time is talking to customers and selling.

Remember that it is easier and cheaper to sell more to existing customers than to attract new customers. This is especially true in a recession, as everyone takes a second look at all expenses. If you’re in a B2B business, customer visits give you real insight into how happy your customers are and whether you’re at risk of churn. If you have a B2C business, invest in rewards programs and other initiatives to make sure your best customers feel appreciated. The risk of collapse increases during a recession as companies prioritize spending and hold back on new initiatives. A high churn rate has a direct impact on company valuation. As a CEO, you are in a unique position to lead by example and your employees will recognize your efforts.

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Stay close to your venture capitalists.

2020 and 2021 were watery years for venture capital, with many venture firms offering initial valuations to unsustainable levels. These same investors must now decide which of their portfolio companies to prioritize and support as the economy slows. Investors should reserve capital for subsequent rounds of fundraising for portfolio companies to see them through to success.

In 2022, lower rounds will become more common. As a CEO, it can be very difficult to admit that your company is undervalued. It’s important for you to communicate with your venture capitalists often to make sure they see your long-term potential.

Embrace your best employees.

The economic recession forces employees to rethink their career choices. If employees begin to doubt the company’s viability, they will take calls on larger companies in the market—regardless of their stock value—that can pay higher current earnings, bonuses, and benefits.

Spend time with your best employees ahead of time and make sure you understand their mindset. Employees always assume that their stock is based on the last funding round, so low rounds create anxiety among employees. Losing top talent will have a very negative impact on your company. Managing and maintaining your momentum is critical to both retaining top talent and attracting new talent.

Several times in my career I’ve gotten ahead of this by offering top employees additional stock option grants to make sure they don’t even take recruiting calls. Works. It’s much easier to stay ahead of top talent than to make counter offers when your employees are entertaining other options.

Emphasize your unique culture and embrace it.

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

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At Black Duck Software, an enterprise security startup, we have created a culture of values ​​and learning. Every employee was a shareholder and considered the company his own. We created learning and training opportunities, and employees felt they were continuing to learn and grow by being with the company.

A unique and identifiable culture is essential to motivating your entire team to fight back against adversity. Both cutting costs and focusing on culture may seem counterintuitive. This is possible because financing unique cultural events is not expensive. It’s really the thinking behind the rallies that matters and affects employee morale. At Blackdock, we ran a Star Wars Lego building contest for our software developers. This event was very popular because developers could show off their creativity and fun in public and it didn’t cost a lot to do it.

Every company’s culture is different, but now is the time to double down. A good culture helps retain talent and ensures you can pull through when times get tough.

. . .

Recessions are a natural part of business cycles, and companies of all sizes must endure them or wither. Startups face a unique challenge because they rely on external capital to finance their growth and evolution to maturity until they become profitable. To get through it and emerge even stronger, conserve cash and pay close attention to your customers, investors, employees, and culture.

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