Optimism for Start-ups in a Recession

Optimism for Start-ups in a Recession

As we have all heard and experienced, the global economy has and will suffer greatly as a result of the Corona Virus. However today is a different time to the 1930s, or even 2008. Whilst no one knows what a recovery will look like, a recovery there will be. Pessimism sells best, but there are also always plenty of lesser explored reasons to retain a sense of optimism, and even start new companies in an economic downturn.

At spaces like X+Why, support is provided for purpose-driven start-ups on a mission to positively rebuild the economy on the other side. They collaborate with organisations such as B Corporation and Founders Academy to accelerate business growth, whilst ensuring adherence to ethical and environmental standards, effectively marrying people and planet with profit – which is needed now more than ever.

Firstly, we are in a recession, but not yet depression. The interventions by the British Government have allowed companies to temporarily go into hibernation, as opposed to allowing irreparable damage to the nation’s productive capacity. How well the economy recovers, will depend on how it is handled, and so far the seeds are being laid for a return to growth when normality is restored, the infrastructure has not changed.

At 80% of wages up to £2,500 a month, the current scheme is more generous than some of the high welfare Scandinavian countries, and instantly transforms the social safety net of this nation, as well as demonstrating that the Treasury does believe the plunge in the size of the economy can be followed by a bounce back, so long as jobs are retained.

The concept of a recession is binary and blunt. All it says is that expectations have flipped from positive to negative growth, at least for two consecutive quarters. After 2008, Canada avoided a banking crisis at the same time that Greece set itself on a irreparable trajectory. Canada ensured that credit continued to flow, and capital formation was not as significantly disrupted. Avoiding a deeper collapse helped keep labor in place and prevented skill atrophy. GDP dropped but substantially climbed back to its pre-crisis path. This is typical of a classic “V-shape” shock, where output is displaced but growth eventually rebounds to its old path.

The key determinant is the shock’s ability to damage an economy’s supply side, and more specifically – capital formation, which is predominantly the ability to keep lending so that capital can grow, recovery happens, workers do not exit the workforce, skills are not lost, and productivity is not down. This ensures that the shock does not become structural.

The shock of the Corona Virus depends on many factors, including the virus itself, policy responses, and consumer and corporate behaviour in the face of adversity. While there is a policy playbook for dealing with financial crises, no such thing exists for a large-scale real economy freeze. There is no off-the-shelf cure for liquidity problems of entire real economies, and we are therefore in a time requiring high levels of innovation on both an economic and medical front.

Such innovations and ideas are already underway, including “bridge loans” that offer zero-interest loans to households and firms for the duration of the crisis and a generous repayment period, a moratorium on mortgage payments for residential and commercial borrowers, and existing treatments that may prove effective in fighting the disease on the therapeutic side.

There are also many reasons to still consider launching a start-up in an economic downturn, some of today’s most successful businesses were launched during a recession. Economic conditions periodically create headwinds and tailwinds, but it is impossible to accurately time such exogenous factors. It often comes down to personal factors when determining the ‘right’ time in your life to launch a venture.

If your start-up can self-fund using money from customers, growth will be slower than with institutional capital, but you’ll be well positioned to reap the rewards of the next economic expansion. Marginal ventures that might be funded in a vigorous economic environment will now not attract as many investors’ time, attention or money. This reality results in valuable resources being applied to a fewer number of viable opportunities, which can offer your start-up the space it needs to grow.

Every entrepreneur who has competed in a vibrant market knows that one of the biggest challenges is getting noticed. As the overall industry noise mounts during a boom cycle, it becomes increasingly difficult to attract the attention of journalists, investors, potential customers and would-be partners. Although it can be more difficult to extract money from customers’ wallets in an economic downturn, the overall decrease in market activity makes it easier for emerging companies to cut through the clutter and tell their story.

On a more personal front, such settings allow determined entrepreneurs to cut their teeth, requiring more creativity, collaboration and problem-solving skills than riding out an upward trend. Adversity also brings teams closer together, and the more arduous the collective journey, the stronger our cohesion and loyalty.

When it comes to pivoting pre-existing start-ups, if your venture is not ideally suited to a market slowdown, you may be able to modify your company’s value proposition to conform to the realities of the market. For instance, a product that enhances productivity can be sold as a revenue generator in an “up” market and as a cost saver in a “down” market.

“A bend in the road is not the end of the road… unless you fail to make the turn.”

Nearly everything you need to fuel your business will cost you less when times are tough. An entrepreneur’s two most valuable resources are her time and money. A down market results in a much higher propensity for companies to negotiate below their list prices and to even barter for in-kind services. Such markets allow you to creatively craft deals that reduce your costs and conserve your cash.

The best we can do, is to decide what to do with the time that is given to us, in the moment that we find ourselves in. And when the only way forward is through, it is retaining that sense of optimism, purpose and hope in times of adversity or uncertainty that will keep us moving forwards together.

Header image by Lori Menna

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