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Is it recession time again?
The nightmarish slow down caused by the COVID pandemic has just passed and global businesses are already entering another phase of slow down since big economic organizations like World Bank and IMF have forecasted recession in this financial year.
Recession is bad news for any business but it’s particularly harmful for Start Ups.
In this Review we will discuss what recession is? How can it affect Startups? And What Startups should do to shield themselves?
What is Recession?
A recession is a period of economic decline that is characterized by a decrease in economic activity, such as a decline in GDP, employment, and consumer spending. Recessions can be caused by a variety of factors, such as a financial crisis, a natural disaster, or a war.
The World Bank and the International Monetary Fund (IMF) have both lowered their growth forecasts for 2023, citing a number of factors, including the ongoing war in Ukraine, rising inflation, and tighter financial conditions.
The World Bank now expects global growth to slow from 5.5% in 2021 to 2.9% in 2022 and 2.8% in 2023.
The IMF, meanwhile, expects global growth to slow from 6.1% in 2021 to 3.6% in 2022 and 3.6% in 2023.
The Federal Reserve is expected to raise interest rates in an effort to combat inflation, which could lead to a slowdown in economic growth.
So startups are already in shallow water and the upcoming recession is yet another looming wave looking to hamper the startup ecosystem. But understanding the problem at hand is the first step towards finding the solution.
Here’s our two cents.
Recession: Problems and Possibilities
In a recent interview with Bloomberg, Uber CEO Dara Khosrowshahi said the company is “recession-resistant”!
Interesting, right?
Because conventional notion says that startups are particularly vulnerable to recessions. This is because they typically have limited financial resources, a small customer base, and little brand recognition. As a result, they may be more likely to experience decreased consumer spending, reduced availability of funding, and increased competition during a recession.
But all these can be turned into possibilities by optimizing your strategy as per the situation.
Let’s analyze the typical problems that startups face during recession and how Airbnb and Uber have coped with these problems and turned these into possibilities for their growth.
1. Decreased consumer spending and demand
During a recession, consumers tend to tighten their belts and cut back on spending. Recessions also often lead to layoffs by companies which restricts the purchasing power of people. This can lead to a decline in demand for products and services, which can hurt startups that are not able to adapt their business models to the changing economic conditions.
That’s where Airbnb and Uber emerge victorious. Both companies began offering a cheaper alternative to traditional options. Uber was cheaper than taxis, and Airbnb was cheaper than hotels. This made them both more attractive to consumers who were looking to save money. Uber offered discounts and promotions to attract new customers, and Airbnb allowed hosts to lower their prices in order to fill their listings.
2. Reduced availability of funding
Investors are typically more cautious during a recession. This is because they are concerned about the risk of losing their money. As a result, startups may have a harder time raising money, which can make it difficult for them to grow and expand their businesses.
To avoid this, the thumb rule is efficient and optimized use of your available funds by reducing unnecessary expenditure and adopting methods that can reduce your operating cost. Apply this thumb rule not just at the time of recession, but in good times as well.
For example, Uber focused on reducing its costs by negotiating better rates with its drivers and by opting an asset-light strategy.
Airbnb focused on increasing its customer base by expanding into new markets and by offering new features that made it easier for people to find and book accommodations.
3. Increased competition
Recession shrinks the market and startups may find it more difficult to compete with established businesses that have more resources and experience. But there is an opportunity too. Recession acts as a sieve to eliminate poor or redundant businesses. In normal economic conditions such businesses bite off from your potential customer pool resulting in low turnover for you. In recession times such services are supposed to succumb, giving you the opportunity to increase your market share. That’s what Uber and AirBnb did.
Both companies were able to grow quickly during the recession. This was because they were able to take advantage of fewer traditional taxi companies and hotels, so Uber and Airbnb were able to expand their businesses more easily by introducing innovative and comparativey cheap solutions. The key takeway from here is you should constantly work on creating a better, more useful and a lean product/service to stay in business even in the situation of economic depression.
There are some other important steps that a Startup can take to stay agile even in hard economic times.
How To Be Recession-Proof
There are 3 important things you need to do to survive the recession, first, save money, second, find ways to increase money, and third retain your customers.
All of these may seem tough in the time of recession but with proper foresight and planning, it is not impossible.
We will discuss how you can achieve this with the help of case studies of the unicorns- Airbnb and Uber again.
1. Diversify Revenue Streams
One way to reduce risk and increase stability for your startup during a recession is to diversify your revenue streams. This means having multiple ways to generate income, so that if one source dries up, you still have others to fall back on.
For example, Uber has diversified its revenue streams by offering food delivery and other services in addition to ride-hailing.
Airbnb has also diversified its revenue streams by offering experiences and other services in addition to short-term rentals.
This has helped to reduce risk and increase stability for these companies during the recession.
2. Cut Unnecessary Expenses
Another way to improve your startup’s chances of success during a recession is to cut unnecessary expenses. This means being mindful of your spending and making sure that you’re only spending money on things that are essential to your business.
For example, Uber has been able to cut costs by using a decentralized model for its operations.
Airbnb has also been able to cut costs by using a peer-to-peer model for its rentals.
3. Develop Contingency Plans
It’s also important to develop contingency plans in case of unexpected events. This means having a plan in place for how you will handle things like unexpected changes in the market, natural disasters, or other disruptions.
For example, Uber’s smartphone application offers much more than just booking rides. Uber’s approach in the post-pandemic period has been to capitalize on the surge in deliveries by expanding into other categories such as convenience store items, alcohol, and groceries, transforming the Uber rides app into much more than just ridesharing. Uber has also launched Uber Charter, a service that allows users to book transport and coaches for large groups directly through the app. Uber Travel, which collects flight, hotel, and restaurant bookings and lets clients in the United States and Canada to reserve rides for each leg of their trip, was also introduced.
So, the point is even if Ubers ride booking service gets hit during a recession it had other contingency plans to generate revenue.
4. Retain Customers
Finally, it’s important to be loyal to your customers and explore ways to retain them. This means providing excellent customer service, offering rewards programs, and keeping your customers engaged.
For example, Uber offers a rewards program that gives customers points for every ride they take. Uber also offers a referral program that gives customers credits for referring their friends to the service. Airbnb also offers a rewards program that gives customers points for every stay they book. These points can be redeemed for discounts on future stays. Also there is a referral program that gives customers credits for referring their friends to the service. These strategies have helped Airbnb and Uber to retain customers during the recession.
While all these are equally important for startups to follow there is another thing to do which needs special attention.
Bonus Suggestion: Networking
You must have heard the quote –
“Together we stand divided we fall“
Although networking is a useful strategy at any economic condition, it may become even more crucial during a recession. Startups must have access to a variety of resources and sources of assistance when times are rough.
Here are some of the ways that networking can help startups survive and thrive during a recession:
1. Access to Fund:
After the success of Uber, Airbnb, Slack etc. many investors are now open to fund startups during a recession. And networking is the only way to get closer to such available funding sources.
2. Access to Customers:
Through networking, startups might meet possible investors who might have access to clients who may be more inclined to support a new company if they know someone who can attest to it.
3. Access to expertise:
In regular times startups can have the liberty to grow at normal speed in terms of experience and expertise, but recession is unforgiving. In such times networking can help startups to connect with experts who can provide advice and guidance.
4. Access to support:
Networking can help startups to connect with other entrepreneurs who can offer support and advice. This can be especially important during a recession, when startups need all the help they can get.
Conclusion
The dark cloud of recession may already be on the horizon, so we need to be prepared.
Let us know how you’re setting up your business to fight falling to recession. Comment below.
