LinkedIn Co-Founder Reid Hoffman on How to Prepare Your Business for a Recession
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The economy may feel stable now, but the warning signs are scary: Three out of four economists predict a recession by 2021, according to a survey by the National Association for Business Economics. So how can an entrepreneur prepare?
The question came up recently on a special episode of Masters of Scale called “Strategy Session." In the show, Hoffman answers questions from entrepreneurs, and I serve as co-host. It’s worth listening to it all (and you can do so here), but the question that struck me the most was about economic worries.
“What can we do now to maybe prepare for a potential recession?” asked Long Hoang, who runs a manufacturing analytics platform called FireVisor Systems. “And when it does happen, what can we do to still keep on growing?”
Here are Hoffman’s three pieces of advice.
1. Stash your cash.
“Put a lot of capital in the bank,” Hoffman says. “Have that capital for flexibility.”
If you’re raising money, Hoffman advises raising more money than you need. That’s a general principal of his — he’s long advised that startups (and especially tech startups) should raise money for “all of the unknown pivots, whether it’s new customer needs or competitive attacks.” But he says it’s especially valuable in the face of a potential recession. “You’re planning for both success and potential volatility,” he says.
However, be careful not to confuse fundraising for success. In a previous Masters of Scale episode, Evite co-founder Selina Tobaccowala described how she took $37 million in funding, which gave her so much freedom that she lost track of her business model. “There was no reason we should have taken so much capital,” she says.
2. Monitor everything.
"Try to be monitoring and develop as much monitoring as you can,” Hoffman says.
You’ll want systems that give you as much visibility into your business as possible, so that you understand exactly what your demand is — and what future demand may look like.
It sounds obvious, but as entrepreneurs focus on the daily grind of building a business, they're at risk of forgetting about the big picture.
3. Act for the long term.
Once your monitoring systems are set up, you may want to make some decisions that feel crazy in the short-term but are designed to help you in the long-term. “Be willing, somewhat, to even under-supply demand versus over-supply,” Hoffman says. “You may be under-realizing certain market opportunities, but if you see any measurement that suggests that that's the right thing, then play it a little cautious.”
Similarly, Hoffman says, you may not want to over-hire right now. Be careful not to weigh yourself down with a staff built for the future when you can’t be sure what that future will hold.
“You're always playing to win,” he says, “but part of playing to win is making sure you get through downturns and volatility."
To hear more of Hoffman’s advice, listen to his special Masters of Scale “Strategy Session” episode.