Five Tips For Managing Your Startup During An Economic Downturn

Amid the most severe contraction since the Great Depression, according to the BBC, no company is immune to the effects of a recession brought on by the Coronavirus.

Five Tips For Managing Your Startup During An Economic Downturn

Amid the most severe contraction since the Great Depression, according to the BBC, no company is immune to the effects of a recession brought on by the Coronavirus.

Guy Kurlandski

Amid the most severe contraction since the Great Depression, according to the BBC, no company is immune to the effects of a recession brought on by the coronavirus. At a time when even top multinational corporations find themselves battered by stormy financial waters, startups are especially vulnerable.

Navigating the impact of the coronavirus won’t be easy, but with the right preventative measures, startups can position themselves to ride out the storm. Here’s what startup executives can consider doing to right the ship:

1. Undertake proven cost-cutting measures.

When the economic skies darken and startups begin to see revenue slip or funding dry up, the natural first step is to contemplate cost-cutting measures. But how should entrepreneurs go about making these tough choices?

Start by cutting all unnecessary business expenses, including nonessential projects, underperforming departments and so on. During these days of remote working, think about whether your startup truly needs a brick-and-mortar space of its own. If not, the solution might be to establish an entirely remote workforce or join a coworking space, which is an excellent way to cut overhead costs.

But, as a growing number of startups have had to concede in recent weeks, some executives, unfortunately, also need to conduct lay-offs. Parallel to state, local and national debates about which businesses are essential and which can be designated nonessential, some startups might need to grapple with the question of which of their employees are absolutely essential and which might be skilled and valued team members but are ultimately less vital to the company’s ongoing operations. Those who fall into the latter camp might need to be let go, but if resources allow, try to keep them on board; shift them to roles and tasks hyper-focused on business development.

2. Turn to freelancers.

To fill critical vacancies while holding down costs during tight times, you might also consider outsourcing work to freelancers if you can't afford to bring on a new full-time team member. Freelancers are readily available throughout industries: According to the 2019 Freelancing in America report, commissioned by Upwork and Freelancers Union, the percentage of full-time freelancers in the U.S. job market has climbed from 17% in 2014 to 28% in 2019, with 57 million total freelancers in the country.

Freelancers are far less expensive to hire than full-time employees with benefits packages, and many freelancers are comfortable with that dynamic: The study found that 67% of freelancers preferred more take-home pay and purchasing benefits on their own, compared to 33% who preferred less take-home pay but more generous benefits.

The rise of freelancing is the tale of a years-long trend — one that I predict the coronavirus could accelerate, certainly in the near term as the newly unemployed look to take on multiple projects to generate income.

3. Be smart about alternative funding options.

For many startups reliant on infusions of venture capital investment, the burgeoning recession poses an existential threat, with more and more VCs set to curb the new deal activity.

Startups can consider alternatives to a VC funding model, especially in this climate. One option is to turn to revenue-based financing, a model for proven growth-stage startups. Under this model, startups can raise capital from a financier who claims a percentage of your future revenue. Trajectory-based financing takes this approach one step further, with capital firms using it to provide nonsecured loans, guided by predictions of future business trends. (Full disclosure: My company offers trajectory-based financing.)

Most important, executives should be wary of who’s offering capital. Taking on excessive amounts of new debt at this time might not make sense for your business. Not all loans are created equally, and debt services can sink companies during economic downturns.

4. Develop a plan of action with your strategic partners.

How you approach your supplier relationships during this period can play a big role in determining how well you navigate it.

Call your suppliers and partners to gauge how they’re handling the downturn and to develop a clear plan of action for meeting the moment together. This will shore up trust and is especially likely to bear fruit if the conversations are built on robust, long-standing relationships. Loyalty to a small set of suppliers can be a major point of pricing leverage.

5. Consider pivoting your business.

Among the best startups’ top assets, agility ranks high – and that’s doubly true in a crisis. The annals of business success are replete with stories of companies that set out to do one thing but, through a series of lucrative accidents, wound up doing something entirely different.

Twitter, formerly known as Odeo, started as a podcast discovery platform. Apple sold preassembled computer kits until the company recognized its potential to spearhead a digital revolution. Sixty-seven years elapsed between 1806, when William Colgate founded his eponymous hygienics company, and 1873, when Colgate toothpaste first hit the market.

If your startup is agile enough, consider pivoting in a direction that might be more profitable in light of the new reality. Fortunately, many startups’ core in-house capabilities — software development, cybersecurity, artificial intelligence, data analytics and so on — have value propositions across a vast swath of industries.

It just might be that the path to surviving a downturn requires shifting course and following a new one.

Thank you! Your submission has been received!