Recessions can be a challenge to manage as a startup. You may be dealing with how to:
However, it can be rewarding to manage startups during a recession when you know how.
We spoke with Matt Hafemeister, former partner at a16z, who shared his expert advice on running a new business during a financial crisis.
In this post we’ll cover:
Note: Managing a startup during a recession is difficult if you don’t have the right tools or partners. Try Jeeves: we’re a global financing partner providing a full financial stack designed for business growth.
“Your job as a founder is to make sure your company can get through an economic downturn because not every company is going to make it.
If you create the opportunities to grow and scale, you’ll no longer have the same 10 competitors that went into a bad economy with you.
You’ll have a more open market post-recession with only one or two competitors. You just need the right roadmap to get there…” Matt Hafemeister
Matt suggests paving your way to profitability with these five strategies:
You can increase your cash runway in a couple of ways:
Even though it’s more difficult to get venture capital during an economic slowdown, it’s not impossible. The last great recession of 2008 produced startups like Uber, Whatsapp, and Slack.
But fundraising in a recession will take time. Matt suggests calculating 24-36 months of cash runway to survive until the economy improves.
If you turn to investors, it may be difficult to raise money externally in an economic downturn, especially for early-stage startups. External investors will be more discerning about where they invest, and they may compromise your valuation.
Instead, you can start your fundraising by tapping into your internal investors who are more likely to have your best interests at heart – they’ll want to see you succeed and preserve their initial investments because they believe in your business.
The potential downside to fundraising internally is that investors could:
Instead of VC funding, you can retain your ownership and increase your cash runway through debt financing. With debt, you’re borrowing money for a limited time and paying it back with interest.
The most common types of debt are bank loans, lines of credit, and credit cards.
The major drawbacks of traditional debt financing are:
You may also like: What is venture debt, how does it work and when to use it?
Cutting costs involves lowering your burn rate, which can also extend your cash runway.
You’ll have more freedom with this strategy because there’s no one to tell you what to do or how to use the money you save.
Matt recommends looking at your burn rate from both a revenue perspective and a margin perspective to know how much real time your business has to remain solvent.
Check out Matt’s suggestions on how to calculate your burn rate in our post, How to extend your startup runway.
Once you’ve calculated your burn rate, consider reducing or cutting costs in these areas:
Discover which spend management tool is best for your business. We compare Payhawk vs Spendesk vs Soldo vs Jeeves.
Depending on how much runway you have, you could also add a line of monthly credit to your funding options.
A line of credit and business credit cards can give you the cash flow you need to take advantage of business opportunities, increase your revenue, purchase supplies, and buy inventory.
However, be wary and benchmark your options carefully. Most business credit cards come with transaction charges, FX fees, hidden costs or annual fees like Amex that can limit your liquidity. To offset the costs, find a business credit card with cashback or with perks and rewards on all your purchases, like Jeeves.
For example, Jeeves offers discounts on tools and software startups typically use, like 25% off Slack and up to 30% off your first year using HubSpot (then 15% off after).
“In a bull market, people are investing in the future for growth and you’re focusing on helping them get to the next stage or providing business value.
But in a recession, people are thinking about how they’re going to survive. So, you need to rethink why customers are coming to you and why they're not coming to you.
Your strategy should focus on your customers’ current needs, which have changed, so you can adapt your product.” – Matt Hafemeister
Whether you're B2B, B2C or service-oriented, your customers’ behaviours are going to change in a recession. With less money available, people are going to cut back on any extra spending and their focus will shift.
Make sure to adapt your product or service to new consumer behaviour in a downturn to find a new product-market fit. And rethink your marketing strategy to match your product development.
A great example of this kind of strategic thinking during economic volatility is the online travel agency (OTA), Hopper. When the travel industry saw numbers crash at the onset of Covid-19, Hopper doubled down on their fintech investments protecting customers’ trips. This private company doubled their revenue during the pandemic and outperformed competing OTAs, like Airbnb and Expedia, in 2021.
Whether you choose to extend your runway, cut costs, optimise your spending, adapt your product to the current recession-minded market, or combine them, you should avoid unprofitable deals during a downturn.
If you’ve set up a new product or want to launch your adjusted product or service, be sure to create a strategy for a healthy pipeline that creates profitable deals.
For example, you could provide incentives for customers to switch from monthly to yearly contracts or you can eliminate free-tier subscriptions and offer limited-time free trials instead.
Above all, you want to focus on attracting high-quality, low churn customers to ensure you can have long-term cash flow because you don’t know how long a recession will last.
Learn why VCs recommend that startups focus on extending their runways and creating healthy pipelines.
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In addition to quick answers, you’ll also receive:
Jeeves corporate cards come with additional benefits, like:
Jeeves' expense management software connects to Jeeves’ line of credit and business credit cards. So, you’ll have greater visibility and the controls you need to reduce costs and cut burn rates with precision across all your offices.
Here’s how Jeeves’ expense management can help you manage your startup during a recession.
Here are 4 examples of how our customers are using Jeeves to survive economic uncertainty:
We hope this article has helped you find your own roadmap for managing startups during a recession.
You can make Jeeves part of your recession-proofing plan because we can be your complete financial business partner.
With one tool, you can fund your business and optimise expenses to outperform your competition. You can get the visibility you need with Jeeves to understand which departments are over budget and how much capital you’ll have on hand to take your business to the next level.
When you tap into Jeeves’ expense management, corporate cards, and payment solutions so you can get the security you need to create a path to profitability and survive any market.
Looking to survive the recession but are not sure how? Try Jeeves.