Four Tips for Startups in a Recession

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.

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.

Hi, we’re Accountancy Cloud

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.

Our experienced and specialist teams of financial experts can assist with all aspects of running a startup. We offer the best online accounting, R&D credits and CFO services for ambitious businesses who want to grow.

If your startup is preparing for tough times ahead, Talk to us today and see how we can help.