There is a cold breeze coming to the startup world, and to every other part of the world as well. The inflation that was supposed to be “transitory” a year ago is still here, and we’ve seen a nearly 70% pullback in the valuation of public SaaS stocks. The dreaded R-word is back on everyone’s lips, and what was a whisper weeks ago is growing into a rumble. Experts everywhere are predicting a recession, one that will hit the tech world particularly hard.
It’s been more than a decade since the start of the last major economic downturn in late 2007. Blips in 2016 and 2020 notwithstanding, the tech world has had it pretty good since the Great Recession fizzled out in mid-2009. This means that this is the first time some startup founders, CEOs, and teams (and even VCs) will have encountered a tech world in crisis. When you’re used to a “Yes, more” market, in which investors are in a risk-taking frame of mind, seeing those checkbooks slam shut is a whiplash moment.
However, the thing about the tough times is that they teach you far more than you’ll ever learn when things are going well. Those of us who lived through the late 1990s (think WebVan and Pets.com) and every boom-and-bust since, have learned something new during every rough time. Mainly though, the main lesson is to never forget that cash in the tank is like oxygen to a diver . . . you have to be able to make the oxygen last in all cases.
Those lessons weren’t always easy, and sometimes it was too late. It may already be too late for some, but even in the worst of times and circumstances, you often have more runway than you think if you are willing to make hard choices and to do it quickly. Here’s what startups of the future can learn from downturns of the past—from someone who’s been there, done that, and made it out the other side.
Follow the Watney Rule
In 2016, faced with another bout of economic uncertainty, we came up with an approach we dubbed the Watney Rule.
Consider this your spoiler alert for the book and movie, The Martian.
In The Martian, botanist and astronaut Mark Watney (played by Matt Damon in the movie) is accidentally left behind on Mars when his crew’s mission goes awry. Stranded alone on an uninhabited planet, the only resources he has are his own wits . . . and some potatoes. By hunkering down, he’s able to survive for a year and a half before a rescue mission arrives.
Watney made it that long because he didn’t sit around and wait for someone else to save him. He used what he had to make the best of his situation. In the same way, a company’s recession survival strategy cannot be built on the assumption that an investor will swoop in with more cash.
Unlike Watney—who was dumped on a hostile planet with little warning—company leaders have the opportunity to save resources during the good times. Just because you’ve raised hundreds of millions of dollars doesn’t mean you have to spend it all before your next round. Quite the opposite. In times when raising money is relatively easy, hold on to some of it. It may be the only cash you have access to when the economy shrinks.
Smart spending is just as important as smart saving. Obviously, you need to spend on some things: a talented team, essential tools, and platforms. However, many newly flush startups spend their money on things they don’t need, and they are often status symbols: think huge offices, oversize teams, and one-trick software.
Once the investments dry up, it quickly becomes clear how much bloat you’re carrying. But it’s harder to take things away when people have gotten used to them. Spend strategically from the start, and you won’t have to make as many difficult cuts when the downturn comes.
Be Aspirin, not a Vitamin—Be mission critical
In 2012, Josh Linkner wrote an article asking startup founders if they were selling vitamins or aspirin. Just as you have to assess what’s a luxury and what’s essential, so do your clients. Linkner’s argument is that selling vitamins is 10 times harder than selling aspirin since you’re convincing people to purchase something they don’t absolutely need. It’s a supplement. But selling aspirin is entirely different; it’s something people need, something that makes their pain go away, something that they will buy regardless of the economy. Being a luxury is fun when there’s plenty of money to go around, and you’re the shiny new product everyone can’t wait to try out. But when the recession comes, these flashy tools are the first to get cut.
Similarly, platforms that serve critical functions, and do it well, quickly become foundational to the way their clients do business. They aren’t going anywhere in a recession. These must-have products include tools for:
- Communication and collaboration: e.g. voice and video calls, messaging. Teams can’t function without quick and convenient ways to stay in touch and work together.
- Productivity: e.g. calendar, project management. No one wants to go back to manually penciling in meetings or sending 15 emails to keep track of one task.
- Customer support: e.g. contact centers, CRM. You can’t afford to lose current customers through bad service, and you still need to find new ones.
- Accounting and finance: e.g. payroll, bookkeeping. Spreadsheets won’t cut it anymore.
Future startup founders take note: These are the products that survive a downturn as every business on the planet is already paying for some version of them, and every business should be looking to lower cost and improve productivity—especially during a recession.
That doesn’t mean companies that make these foundational products shouldn’t try to innovate. They definitely should, but focus on ways that improve the core product.
If you can show a prospect that you can give them, for example, a communications tool that does more than what they’re looking for, does it better than what they already use, at a lower cost, makes their employees more productive, and performs an additional core function, you’re going to be in demand in a recession because you deliver much-needed value for the money.
Get more bang for your buck
Companies that save their money in the good years often see it go further during a recession. You can find bargains and attract talent that might otherwise have been out of reach.
Start with renegotiating your service contracts. That includes contracts for any real estate you’re leasing out, as well as deals with software providers and other suppliers. In a strong economy, when providers and landlords have a steady stream of clients, they may greet your threat to cancel with a laugh. In a recession, when clients are fewer, they’re more likely to give you a discount to stay.
Another benefit that startups with a financial cushion can reap from a recession is their dollar attracts bigger fish in the talent pool. When all your competitors can afford to offer high salaries, you might struggle to stand out. But when the economy takes a downturn, big spenders stop splashing the cash or even go out of business. Suddenly, talent who wouldn’t have deigned to apply for a job with you before are happy to take your call.
Bottom line: Don’t panic
Recessions are a shock to the system—to the entire economy and on a personal level. Young CEOs and founders may not have been working during the Great Recession, but they may well have seen relatives lose jobs. They probably took note of the shuttered stores and grim headlines. Those difficult memories make the prospect of a shaky economic future even scarier.
However, here’s one thing that going through multiple downturns teaches you: Yes, every boom has a bust. But every bust has an end.
Leaders will have to make difficult decisions in the coming months and years. Ready or not, it’s an opportunity to find out what you, your team, and your business are really made of. Those who can rise to the occasion may well come out stronger, more appreciative of investors’ cash, and better prepared for the inevitable next time.
Craig Walker is the CEO and founder of Dialpad, a cloud communication and collaboration company.