How to Run a Startup Through a Downturn Scarcity drives creativity and innovation; entrepreneurs can flourish in a downturn with the right mindset and strategy.
By Phil Santoro •
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A hesitant market and retraction in funding has directly impacted startups at every stage of growth. So how can founders steer their companies through a difficult period and come out stronger on the other end? I've led businesses through two economic downturns, in 2008 and 2020, and I've found that while no two downturns are the same, key learnings can help founders effectively manage through these headwinds.
Here are some critical tips I've learned when times were at their most dire.
Focus on what you can control
Negative headlines have risen steadily over the last two decades alongside the rise of cable news and social media. Despite study after study showing the poor effects on mental health as a result of negative headlines, the trend has continued. Why? It's simple: negative news sells.
Downturns are distracting and stressful, especially for business leaders who are trying to focus on decisions. According to a 2021 Harvard Business School survey of global CEOs, the most recent crisis left them feeling just as "scrambled and unsure as their employees."
To effectively manage through negativity, it's important to focus on what you can control: reducing waste and expenses, increasing efficiency and building your product or service to serve customers better. Tuning out the noise will help you maintain focus and stay grounded.
The reality is that downturns impact everyone, and if you're affected, your competitors are too. Focusing on your business and what you can control will leave you in a far stronger position once the market stabilizes.
Related: How to Recession-Proof Your Business
Keep cash on hand
If you wait until a downturn to think about generating cash, it's already too late. That's why companies must reach a profitable state on a timeline that makes sense for that business. Even in growth mode, founders can focus on a clear line of sight to profitability while simultaneously planning when to limit overgrowth.
The main benefit of having cash on hand during a downturn is that it lets you continue investing with a focus on the long term while everyone else is waiting it out on the sidelines. It also means you won't need to raise funds during a time when purse strings are tight, and you'll inevitably get less favorable terms. According to our research, the most common reason startups fail is, unsurprisingly, running out of money (37%). By having cash on hand or cash coming in, you can avoid the worst possible scenarios.
Another important way to conserve cash is to build a culture of reducing waste. Our portfolio companies perform a monthly bottom-up expense review to help cut waste continuously. When there is a downturn, this eliminates the need to review prior month's (or year's) worth of expenses. Leadership can instead focus on running the business and making continuous improvements.
If you have money on hand, what can you do with it during a downturn? You can negotiate better terms on long-term contracts like real estate and advertising or focus on hiring for key positions with more available talent on the market. Cash can solve many of your problems, but maybe more importantly, cash can always be put to use for longer-term investments.
Related: 4 Ways to Adopt and Maintain a Growth Mindset Even During a Recession
Look to the future
In 2010, Harvard Business Review analyzed 4,700 public companies that weathered the recessions of 1980, 1990, and 2000. The researchers found that 17% of the companies fared particularly poorly — they went bankrupt or were acquired — and 9% flourished coming out of these difficult times, outperforming competitors by at least 10% in sales and profit growth.
What did the businesses that thrive have in common? The authors shared that the successful companies focused both on operational efficiency and continuing to invest "comprehensively in the future by spending on marketing, R&D and new assets."
Downturns can be a great time to focus on building so that your company is ready for the eventual upturn — which will happen. During economic slumps, many companies pull back and wait on the sidelines. That's a reactionary, short-term mindset and creates opportunities for other businesses that have their eye on the long term. If you have enough cash to sustain the company during a quiet period, you can more aggressively invest in growth at a time when others aren't. This can mean targeting new consumer segments, working on a new product or hiring a new team of developers.
Related: 4 Ways Entrepreneurs Can Achieve Massive Growth in a Recession
Conclusion
Scarcity drives creativity and innovation; entrepreneurs can flourish with the right mindset and strategy. Remain focused on building your business, think long-term and sketch out opportunities for growth. If you have managed your capital and been prudent about your growth strategy, then you will be well-positioned to take advantage of a slowdown and enjoy a head start when others still have their business in first gear.
