Recession-proofing your startup
The Godfather introduced the world to a new phrase — ‘Going to the Mattresses’.
The core idea was that mafia teams would stick together during a war with other mafia families. They would live together (hence the mattresses) and manage to survive the war by watching their backs and by doing the basics right. It’s a time-tested strategy that earns them the respect of mafia bosses as well.
That same approach is applicable to surviving a recession, especially if you are a startup. What follows is a set of basics that need to be put in place, to ensure survival. This isn’t the total list and for your specific startup there will be other actions required too. But the idea of this post, is to get you started on your thinking journey — sort of, help you decide which mattresses to pick!
- Accept that it is happening
There is data on everything, if only you look for it. Young startups tend to have very little data, because the volume of customer interactions or transactions is low. Don’t depend on your data sets alone. Although they are indicative too, look for third-party sources. You may choose some government statistics, pick some industry trends, read up on analyst reports or even decide to believe some business news channels. The choice of medium is yours & so is the importance you place on it.
But get enough information to convince yourself that it is happening around you. If at the end of this fact-finding mission you believe that there is no slowdown, you can stop reading at this point and peacefully go back to sleep under whatever rock you choose. On the other hand, if you feel like the slowdown might affect you, read on!
2. Which side are you on
Not all businesses suffer during economic recessions.
You have to figure if your business will be adversely affected or if it can actually gain from the larger trend. FMCG & alcohol companies are well-known to be recession proof. But certain kinds of startups can benefit from this too.
If you are running an #HRtech startup which helps firms cut paperwork and processing costs, you might see a surge in demand as companies look to trim the fat internally. #DigitalMarketing outfits who sell verified leads to clients find takers as marketers seek more assurance before spending on their lead funnels. #e-commerce platforms look to on-board newer startups who can sell via the platform, since end customers are looking for more variety and more value for their money.
If you are a #fintech startup, you might thrive despite the meltdown. Startups working in sectors like loans & credit, risk evaluations or even re-framing distressed assets. A recession is a great time for finding good companies at a bargain price and there is always room in the market for talented teams that can do this well and at scale. Niche consulting companies also do well, as client businesses look for expertise that can help them survive the slowdown.
A recession is not bad for everyone and definitely not equally bad for all.
3. Know-Your-Business!
As I mentioned above, knowing what line of business you are in and finding out the market’s prospects for it, is key to survival. This ability to understand the core of what makes your business tick is rather rare, especially among startups. Beginner’s luck helps many of them get off the ground. But then they lose their way as they see other companies make money or get funded for similar business models.
Before you know it, words like ‘pivot’ start getting used to cover up the lack of a concrete business strategy. One way to understand your business and its components better is to undergo a business model canvas exercise with an external & experienced moderator. It goes a long way in providing clarity to the founding team on what to focus on, during bad times.
4. Know-Your-Customer!
There is enough and more material written about this already. I don’t think I have a new point of view to add to this one. And yet almost 3 out of 5 startups that I talk to, struggle to explain their customer’s profile sharply.
If you don’t know who your customer is, it is tough to survive in any business. And in a slowdown, that lack of understanding can kill you really fast. If you are a B2B startup, you have probably met your customer face to face. If you are B2C oriented, then you probably have data on your customers. Either way, use the knowledge within the team to build sharper consumer profiles. And this should not be a marketing-team-only exercise either. The business survives on its customers, so everyone needs to be seeped in understanding who the customer is and what his/her or its needs are.
Consumer #insighting skills can be a life saver when it comes to knowing consumer needs, designing products or services for them and even finding service gaps. While almost all startups use the phrase, in my experience less than 3% of all startups do this correctly and at the right depth. So, for now, leave it aside. Just focus on your basic KYC and build profiles that you can productise for.
5. Cash(flow) is king
Businesses don’t shut down when they have cash in their bank. They shut down, when they don’t.
While spending slows down in a recession, businesses shut down more because of lack of cash in their bank rather than because of absence of business & clients. So, conserve your cash when you are going through a slowdown, or if you can, increase your cash pile.
Obviously, this also means managing your costs, so outgoing is lower. You need to take a hard look at your costs and trim the fat wherever needed. In my experience, most founders are good at doing this bit. Since they started from a zero base, most of them are well aware of their cost structure and can easily point to parts of the current structure where costs can be reduced. But lowering costs is a finite game. Even if you take your cost base down to zero, the business won’t survive, if it doesn’t make any money.
So, focus on lines of business that can make you money and focus more on clients who will actually pay you for the work done. Prioritize work to optimize your cash conversion cycle and read up about it a bit more if you feel the need. But stick to basic principles and keep an eye on how much money walks into your bank account.
6. Find the right partners
What is the talent density of your startup ?
All downturns are difficult to navigate and large companies manage to do this because of the depth of talent they already have on board. Startups are vulnerable early on because the founder might be the smartest guy in the team. Most others might be great at operations but there is no think tank to craft and execute strategically.
So, find someone outside the current organisation. Startups are meant to be unconventional and your hunt for partners can leverage this advantage. Look for mentors, incubators or co-founders who can bring experience and gravitas on board. It is unlikely that this kind of talent comes cheap and hence founders struggle on compensation for them. While this needs to be dealt for the specific business, the core principle should be that both sides see value in the business entity. Founders can use a mix of equity and cash to bring in the right partners for such difficult times. The incoming partner shares in the risk and hence will share in the reward — if the firm emerges healthy on the other side.
It’s a fair trade-off but you don’t see it too often with startup founders. Part of the problem is that they value their equity far higher than its present value and hence hold back in allocating it. Founders and startups can decide this by answering a simple question — Will bringing in the partner increase the overall value of the startup ? If the answer is in the affirmative, then it is simply a matter of math. Focus on getting more ‘IQ power per square foot’ within the firm, during bad times.
A similar case can perhaps be made, for attempting a funding round with angel or small VCs. But this route is well-known and frankly, most startups aren’t funding reading early in their lifecycle. So, leaving this aside for now, & will probably write a separate post on this, another time.
On the other side of the tunnel
Like I said before, this list isn’t exhaustive and I can’t claim that it is all you need to do for your business. It is meant to serve as a starting point. And I hope that your startup and you are both together at the other end of the tunnel.
What I can promise is that if these habits are taken care of during the downturn, then it is natural for the startup to emerge stronger from the recession. Globally, Airbnb and Uber came out stronger after the 2008 crisis had taken its toll on most of the industry. There is no reason to be believe that your story will not be told at the end of this recession cycle.
And while respect from mafia bosses might be a long shot, other startup founders will definitely look at you as a hero!
