The First-Time Founder’s Guide to Surviving a Recession

December 14, 2022

The First-Time Founder’s Guide to Surviving a Recession

Economists are weighing in on the possibility of the world tipping into a recession in 2023. For most first-time startup founders, surviving your first recession will take whole new levels and types of skills, determination, and courage. 

Surviving a recession isn’t easy, especially for startups. 

In the last recession (2007-11), we lost millions of jobs worldwide; whole economies crumbled, businesses collapsed, and surviving as a startup was like being a tribute in The Hunger Games

In late 2022, the warning signs of recession are everywhere, from mass layoffs in the tech sector to rising inflation, central bank interest rate increases, and a downbeat stock market.

According to Morgan Stanley, global growth projects at 2.2% in 2023, lower than the International Monetary Fund’s (IMF) 2.7% prediction. Analysts expect the US to narrowly avoid a recession in 2023, although the UK and Eurozone will almost certainly slide into negative economic territory. The IMF has already pressed the panic button, saying the global economy is now facing the “biggest test since [the] second world war.” 

Recession fears impacting startup fundraising prospects 

Since Q4 2021, it’s become more difficult for startups to raise venture capital (VC) funding, and that downturn has continued throughout 2022. As a result, job offers and term sheets are being pulled, even after deals have been signed. 

Y Combinator, the world’s leading startup accelerator — with 137 startup graduates worth over $300 billion — issued a sobering warning to founders: “The safe move is to plan for the worst.”

Preparing to navigate the turbulent and uncertain waters of a recession includes: 

  • Founders, don’t expect to raise any new money for the next 24 months; 
  • If you’re in the process of fundraising, be prepared for it to take much longer than expected, fail altogether, or for the terms to be so bad that it’s better you walk away (Well done if you do secure funding and the terms aren’t so terrible that you should have thrown the towel in!);
  • If you aren’t profitable, now’s the time to achieve profitability and build up cash reserves as quickly as possible;
  • Have enough cash flow and runway to survive for 24 months without additional external funding. 

Startup founders are known for resilience in the face of overwhelming odds and are usually fairly optimistic. You have to be, right!? But optimism and confidence — bordering on foolishness — are often partners in crime, and it can be difficult for entrepreneurs to tell them apart. 

So, to hit the lesson home, YC said: “If for whatever reason you don’t think this message applies to your company… please reassess your beliefs monthly to make sure you don’t drive your company off a cliff.”

With all that in mind and the unavoidable drumbeats of doom echoing around Twitter and LinkedIn, what should a first-time founder do to survive the next recession? 

Six Tactics and Tools for Startup Founders 

1. Review and closely monitor your startup’s cash flow, revenue, and burn rate 

Poor cash flow management kills startups. 

CB Insights data confirms poor cash flow management is the number one reason for startup failures, responsible for a massive 38% of startup deaths worldwide. CB Insights found “an inability to generate sustainable revenue” and “simply running out of money” were two of the most common reasons for failures amongst a list of 239 high-profile startup deaths. 

The startups on that second list from CB Insights raised anywhere from $15 million to $1.75 billion! It doesn’t matter how much you raise; if you spend more than you’ve got in the bank and coming in, then your startup will run out of money. 

Here are the metrics founders need to watch very carefully: 

  • Monthly recurring revenue and annual recurring revenue (MRR & ARR) 
  • Customer lifetime value (CLTV)
  • Customer churn rates (what percentage of your customers are you losing every month/year?)
  • Burn rate (fixed and variable costs); 
  • The number of sales leads in the pipeline, conversion rates, CLTV of new customers, and how long it takes to convert a prospect into a customer (sales cycle)
  • Actual cash flow vs. projections: What have we got coming in, and what money is outgoing monthly? 
  • If you aren’t profitable, ask yourself, do we have money in the bank/in reserves? 

If so, do some scenario planning: Review the runway if revenue remains unchanged, reduces, or increases. 

Based on this, determine how many months you have left and what revenue increase it would take to reach profitability (MRR), assuming costs stay the same.

Having a clear and proactive handle on these metrics is essential. It always has been for any business 

owner. When fundraising is a challenge, startups live and die by their runway and how they’re controlling cash flow. 

2. Reduce costs wherever you can without negatively impacting growth 

During difficult times, founders are always looking for ways to cut costs. It’s a smart move, even if it means reducing headcount, which is never easy. 

However, making the right cuts are vital; otherwise, you risk killing the patient while attempting to save a limb. Marketing and sales are the engines that drive forward growth. It’s tempting to cut costs in these areas. 

In a recession, that’s usually a mistake. Instead, you must constantly and consistently monitor the impact and outputs of marketing and sales teams, freelancers, or external agencies. Then, cut where necessary, but not at the expense of increasing revenue. Instead, make smart, iterative, data-driven improvements without killing growth. 

3. Manage business cash flow carefully 

Careful management of business cash flow is essential in a challenging economy. 

That’s where automated accounts payable (AP) software can play a valuable role. Making it easier for financial teams to ensure money is flowing in and out at the right time to keep the company in a healthy, cashflow-positive position. 

Find a good tool to manage the invoice lifecycle and accounts payable, and take more control of your startup’s financial management. 

4. Take active control of personal wealth management and finances

When you’re in crisis mode, looking after yourself is often last on a list. But, unfortunately, that’s another mistake. If you aren’t looking after yourself, your startup won’t be in the best shape. So carefully monitor your mental health and energy, and watch out for burnout. 

At the same time, you need to manage and monitor your finances. One of the best ways to do that is with a wealth management app. Especially one that’s a comprehensive wealth management and financial planning and tracking app for founders and diverse investors. 

5. Save money on collaborative communication 

In the war for talent, remote-first startups are winning. Not only does having a remote team massively increase your talent pool, but it can also reduce costs, giving you a huge competitive advantage that positively impacts your bottom line. 

Online collaboration software became popular during the pandemic, and many companies have stuck with remote working or hybrid solutions. Take the time to find an asynchronous communication tool that helps your team stay in touch no matter their communication preferences and where they’re working from!

6. Cut costs on online content creation 

Online content creation takes time and effort and usually requires at least one full-time marketing person dedicated to that role or a freelancer. 

Creating high-quality content has never been more important, especially in the hyper-competitive B2C and DTC spaces where Instagram and TikTok dominate. Visuals are everything. 

One of the best ways to improve the quality and output of images while cutting costs simultaneously is to use an AI-powered app to touch things up. Apps like these can dramatically reduce the time it takes to remove objects in images and saves you money on image-based content creation. 

Key Takeaways: How Startups Can Survive a Recession 

Building a startup is always challenging. It’s even more difficult now there’s a recession to survive. Cashflow, runway, and burn rate are the three most important navigational guides you can lean on. 

Everything else is secondary. And yet, everything else matters too. So, sweat the small stuff because, in a recession, the small stuff matters. As a founder, you need to take control of revenue and costs without micromanaging your team. 

Not easy, we know! 

A recession will test your leadership abilities and your startup’s very survival. Here’s a quick reminder of 6 ways you can navigate your startup through a recession with the right tools and tactics: 

  1. Review and closely monitor your startup’s cash flow, revenue, and burn rate;
  2. Reduce costs wherever you can without negatively impacting growth; 
  3. Manage business cash flow carefully; 
  4. Take active control of personal wealth management and finances;
  5. Save money on collaborative communication;
  6. Cut costs on online content creation. 

Tackle these one by one, and your startup will quickly become recession-proof!

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