Four Tips for Startups in a Recession
Most economic forecasters now expect the UK to enter a recession this year. The question is, is your startup prepared? This blog will provide 4 ways to protect your startup through difficult times.
Inflation’s climbing, funding’s ending, cost of living’s growing…these are the signs of a recession on the horizon. Even the most hopeful of predictions give the UK economy such weak growth that the term ‘stagnation’ is now being used as its adjective.
Luckily, (but not really), startups have some recent lived
experiences of surviving the unprecedented market conditions of the
Covid pandemic. Using the lessons learned during this time it should be
possible to prepare for, and get through, the looming recession and
period of rising inflation. Let’s get into 4 practical steps you can
take to protect your business through tricky economic times.
The impact of a recession on business
You might expect that during a recession there’s a large
increase in market volatility and risk. However, markets generally react
pragmatically, this is also true of startup investors such as angels
and venture capitalists. Although business opportunities might be more
limited and the investment volumes might be down, with companies
altering their risk management profiles, there’s still a market to
operate in. Startups just need to prepare, be savvy, and take calculated
risks based on achieving long term growth goals.
How to survive a recession
Here are our tips for startups in a downturn.
1. Make. A. Plan.
Your startup will already have a growth plan and you’ll no doubt be implementing it and moving toward your goals and the next funding round. But, a plan is only useful up to the point that something changes. A recession is that something. Not only will you have to revisit your growth plan, but it would be wise to also plan for a range of scenarios that pose a risk to your business.
What if cash flow becomes a problem? Will you need to reduce headcount? Will you need to prioritise your ongoing projects and focus on a core one?
Or what if your co founder faces financial pressure and has to get another job somewhere?
Look for your startups weaknesses and make plans. This way
you can look out for the indicators and make timely decisions that might
make the difference between your startup surviving or not.
Need help securing funding?
2. Reduce your burn rate
The burn rate is the speed at which a startup spends its initial capital. Remember, in the early stages a startup may not be profitable for some years. Just look at startup behemoths like Uber, Spotify and Tesla. In a recession, capital may be harder to come by as investors look for less risk.
So, how can you make the most of the capital you do have? Reducing your burn rate will help you survive longer. It’ll also communicate to investors that you have the necessary skills to lead a business through a downturn.
Reducing your burn rate doesn’t mean firing everyone. Unless your business has overinvested in a particular area, reducing staff should be a last resort. Making sensible hiring decisions during normal market conditions gives you the freedom to know that your staff team is secure. This creates a trusting and happier work environment - the makings of a culture that you can’t afford to lose, especially when trying to keep your team. Just think, if your headcount is all over the place and you need to lose people just to survive, you’ll likely lose trust and cohesion within your team too.
Areas for immediate savings are ‘discretionary spending’ and things such as SaaS costs. Look at the range of different tools your startup is using and get rid of any that don’t necessarily get used much. You should also push your suppliers for savings and renegotiate yourself out of original deals. All businesses are in this together and you’ll find a certain amount of flexibility and dynamism from those that want to keep your business.
On the opposite side of the coin, make sure you collect cash from customers who may be trying to manage their capital outflows
3. Evaluate your valuation
As markets start to slide during a recession, your valuation multiple might need an adjustment. A quick way to perform this calculation and see how your startup has been impacted is to look at the public markets. By measuring the adjusted multiples of the leading public companies in your industry, you can understand the general magnitude of the change in value for your company.
4. Understand your cost base
Understand where you’re spending your startup’s money. This sounds simple but there can be a lot of inefficiency and spiralling costs in early stage startups. Perform a deep analysis of your numbers and develop a strategy with your management team to cut costs as growth starts to slow down. Look ahead and see how much you might need to save if your next fundraising round is delayed by 3 or even 6 months. Plan for these scenarios and put your startup in the best possible place for survival.
To sum up
It’s looking highly likely that a recession is just around
the corner, not just in the UK but in many other leading economies. With
foresight, and by using the experiences of the recent past, startups
should be able to put themselves in a strong position to avoid the worst
shocks created by any change in market conditions. By planning and
efficiently managing resources and cash flows, your startup can continue
to thrive, even in the most challenging circumstances.
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We’re here to help startups and businesses, like yours, get their finances right. We offer market leading accountancy and financial services, allowing ambitious business leaders to free up time and resources to focus on more important things, like growth.
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If your startup is preparing for tough times ahead, Talk to us today and see how we can help.