What startups could learn from the Great Recession
Visualize a startup right at the beginning of the Great Recession of 2008. One fine workday morning, there is a barrage of calls from panicked customers, each of whom wants to cancel his/her order. By the day end, a full order book goes back to being empty, and the coffers are all but drained.
In such a situation, the first reaction of business leadership is to trim expenses. They can forget the plans for a jazzy office, and must be ready to get their hands dirty, often literally, as they will need to let go of many administrative and other staff members.
This is also a great business strategy lesson. Such a situation leaves little time for tasks that do not generate any clear or meaningful revenue. Everyone must sell, and nobody is too big to pick up the phone and wax eloquent on the attributes of a product or service and why the prospective customer needs it.
How is the pandemic similar?
The pandemic is not unlike the Great Recession. ‘Shape up or ship out’ is the guiding line for both, with a lower tolerance for errors. Numerous startups — and even bigger operations — were wiped out in 2008–2009, and the same is already happening this time around. Conversely, many startups not just survived, but thrived. It clearly is time for business leadership at startups to dig in their heels and use the lessons they learnt or can access.
The economic impact of the pandemic is not going away anytime soon, either. Industries have been gutted, and millions of people are without jobs. More than 40 million people in America (over a quarter of the workforce) filed for unemployment claims during March-July 2020. The upside, though, for those who fight it out, is better access to talented people and lower competition in the market.
What could startups learn from the Great Recession?
Tough times offer tough lessons. Here are some great business strategy lessons for startups:
Take the chance to improve
When the Shanghai Maglev (one of the fastest trains in the world) is running at its maximum speed of over 400 km/h, or even at its average speed of a slower (!) 250 km/h, it is not the time to make improvements in the train. It needs to be in the shed for engineers to work on it. Similarly, when the economy is down, it is a good time to build up infrastructure and take on some well-planned technical debt. Create new products, improve existing ones, so that when the upturn comes, the startup can accelerate where others might just be starting to run.
Sign long-term contracts
When economies are on the up, the tendency is to keep signing short-term contracts, allowing for frequent and fast price increases. It is this very factor that could pull down the company when the going gets tough. It might be better to eliminate this practice in favor of long-term contracts, letting go of potential short-term revenue highs for long-term, sustainable inflows of cash.
Raise more cash and save more of it
The tendency when raising capital is to spend it fast to make improvements, investments, or what have you. Putting aside a good part of it could be a wise decision, as the startup could be the only one with a pool to dip into when the chips are down. Work on minimal amounts of cash to keep operations running, as smaller deals and longer sales cycles could extend the strain on revenues.
Look for unexpected acquisition opportunities
Business leadership should cast its sight beyond mere survival to winning. Buying up a big — or even the biggest — competitor is not as unearthly an idea as it may seem, because in a recession, it is hard to raise funds to run operations. There may be unexpected chances to acquire competitors, possibly in equity deals with no cash required. It is in fact wise to look ahead and identify possible targets, of course being clear about why those would be good targets.
Ensure customers cannot do without you
Look away from maximizing revenues from customers to maximizing the utility they gain. This is a surefire way to ensure you are such an important part of their operations that they would not really want to consider cutting this expense. Companies must do their best to improve the customer experience and become a deep part of their operations, becoming indispensable to their success.
Find more customers and revenue streams
A great business strategy in these times is to look for new customer segments or revenue streams that are less likely to be affected by economic strains. Affluent customers tend to not cut back their spending by much; similarly, large enterprises are stronger on financial resilience than smaller operations. Pivoting focus in these directions would be a very wise choice.
The end word…
Complacency is a surefire path to downfall. Time and again, the best business plans have been upended by economic or other upheavals. Recessions tend to come in at fairly regular intervals, and are part of economic cycles. It is important to visualize what could come next, and be prepared with the right strategic options to ensure progress on the path to success.
