Lessons Learned from Past Recessions

A Founders Journey

One of the hardest aspects of a Founders’ journey is knowing when to ask for outside advice and from whom. As CEO you are expected to have the right answers for the many unexpected surprises you face in your startup journey, esp. when the economy takes a downturn. Your investors can provide key assistance in terms of understanding broad economic trends and financing options. However, they are most often not the right person to provide the best advice on your responsibility to navigate the murky waters ahead.

Since my arrival in Silicon Valley in 1999, I have experienced the dotcom downturn of 2001, the financial crisis of 2008, and the adverse consequences of the unexpected economic dislocation created by the Covid-19 pandemic of 2020. Although each of these downturns impacted the startup world in a different way — some clear repeatable lessons have emerged that founders should consider as we enter a new global recession in 2023.

When recessionary expectations hit, it gets a lot more difficult and more expensive to raise capital. VCs become more conservative in deploying capital and the terms are less favorable to Founders. Therefore, a Founder needs to immediately consider how to extend their runway so as to raise as little outside capital as possible in an economic downturn. Your “Burnrate” needs to prioritize your platform/product/service to better meet market expectations. This could include exploring cost-effective channels like mobile app development to engage with your customer base more efficiently. You also need to reconsider your pricing and GoToMarket (GTM) strategy.

Pricing and GTM Strategy

A recession is a perfect opportunity to reconsider your existing pricing and sales strategy. In a growing economy, direct sales via your own sales force may be the best option. In a recession, however, you need to reduce the sales cycle and cut the cost of marketing and selling your product/service. A well planned and executed partnership strategy, especially for B2B and B2B2C companies, will allow you to generate new sales thru a reseller channel or licensing strategy that can address both the cost and the length of the sales cycle.

Meet With Existing Customers It is of course less time consuming to sell more to existing customers than to land new customers. This is especially true in a recession as everyone is taking a second look at all expenses. Visiting with existing customers to discuss how your product/service meets their expectations and what improvements you can make will provide you with real insights into whether your product/service is “nice to have” or is is critical to their business. Thus, reducing the risk that you might be surprised by a New Year’s cancellation notice due to cost cutting at your customer. For more on the cost of acquiring vs retaining existing customers, see these surprising Stats:

http://bit.ly/3WVicMB

Lower Valuations and Employee Moral

The past several years have seen crazy valuations as many venture firms bid up start up valuations to unsustainable levels. These same investors will now need to prioritize their portfolio and decide which to support with additional financing and which to let die. IPOs will not be exit strategy for at least the next 18 months and therefore startups will need to focus on growing their business in a slow and sustainable way. Scaling for hypergrowth is simply not an option.

One issue a Founder needs to carefully consider is the impact that a recession will have on the moral of their existing employees, especially if you have to make layoffs. Let us face it in a recessionary time, employees may consider employment offers from larger more recession resilient companies. Therefore, it is critical to carefully consider how you can motivate your best employees to remain with your Startup.

Get ahead of this. Spend time with your best employees making sure you understand their mindset. Employees always assume their equity stake is based on the last round of funding, so down rounds create employee angst. Losing top talent will have a very negative impact on your company. Managing and maintaining your momentum is critical both in terms of retaining your top talent as well as recruiting new talent. Additional stock grants and one-one-one conversations about their existing and future career path are essential to retain and motivate your key people.

Emerging Resilient

Uncertain times are a natural part of the business cycle and companies of all sizes must weather them and still try to grow. The challenge of surviving in a recession requires a different set of skills that prioritize careful planning. Startups that are not yet profitable face a unique challenge as they have to rely on their existing investors to fund their grow. If you want to survive focus on conserving cash, revisit your sales strategy and meet with existing customers to understand their pain points and do not forget to be a positive leader within your Company — clearly communicating your strategy for surviving the hard times and emerging victorious on the other side.