5 Ways Startups Can Prepare for a Recession

Startups face unique challenges during economic downturns. They typically aren’t yet profitable and so are reliant on outside funding—and therefore are especially exposed when macroeconomic conditions change. Start-up CEOs must get on the road to meet customers and make it through a recession. They must also ensure that their company culture is maintained and that top employees are retained. And they need to do whatever they can to extend their runways—including taking on a line of credit.

Stocks are down 20% from their peak, indicating that we are in a bearish market. Many economists predict we will enter a recession in the next few quarters if we’re not in one already. How can startup CEOs prepare for and survive a recession with the right strategies and tactics?

I’ve spent the last three decades in the software industry, including three stints as CEO as well as serving on the boards of 10 private companies and as an advisor to many others. I’ve led or advised companies through the dotcom bubble bursting, the 2008 financial crisis, and the Covid recession. Every downturn is different. However, I have found that there are some key steps startups should follow when the economic environment becomes worse.

You can extend your runway by taking steps. Now.

It is much more difficult to raise capital when there is a recession. You need to extend your runway or your “cash out date,” so plan to survive on the capital you have. Spend money only to improve your product or service or to increase sales. No more “nice to have” expenses: Scale back on new initiatives, prioritizing only those that have a near-term chance of success.

In recessions “cash is king,” so you need to make sure you have enough to get through to the eventual expansion. To increase your equity capital, you can take out a line credit. Even though rates have risen, interest rates are still low and affordable than new equity financing.

Be proactive and embrace your best customers.

As CEO, a recession can be a great opportunity to build relationships with your most important customers. They are also feeling the effects of recession. Customers are always eager to meet the CEO of the company that they purchased from. This gives you the opportunity to visit customers and have time with your salespeople. Zoom allows you to meet up even if it is impossible to meet face-to-face. You don’t have to be uncomfortable selling.  I recently spoke to a founder/CEO with a technical background who told me he “learned to appreciate sales” even though he was uncomfortable selling at first. If you’ve historically thought your time was best spent on product, it’s time to reconsider: In a downturn, your best use of time is talking to customers and making sales.

It is cheaper and easier to sell to existing customers than it is to find new customers. This is especially true during a recession when everyone is reassessing all their expenses. Visiting customers can give you a real insight into the happiness of your customers and help you determine if you are at risk for customer churn. B2C businesses should invest in reward programs and other initiatives that make their best customers feel valued. Recessions can lead to a higher churn rate as companies reduce their spending and cut back on new initiatives. Company valuations are directly affected by high churn rates. Your CEO position is unique and you will be recognized by your employees for leading by example.

Stay in touch with your venture capitalists.

Venture capital was not available in 2020 and 2021. Many venture funds bid for unsustainable start-up valuations. Investors must now choose which portfolio companies they support and prioritize as the economy slows. To ensure portfolio companies’ success, investors will need to save capital for future fund-raising rounds.

Down rounds will become more common in 2022. Being a CEO can be hard when your company’s valuation is low. It’s important for you to communicate often with your venture investors to make sure they see your long-term potential.

Encourage your best employees.

Recessions force employees into a rethinking of their career options. If employees start to doubt the viability of the company, they will take the calls from larger firms in the market — regardless of their equity upside — that can pay more in current income, bonuses, and benefits.

Be proactive. Spend time with your most talented employees to understand their perspectives. Employees believe that their equity stakes are based on the funding round before them, which can cause employee anxiety. Your company will suffer if you lose top talent. Maintaining your momentum is key to both retaining top talent, and recruiting new talent.

This was something I did several times throughout my career. I offered additional stock option grants for top employees to ensure that they didn’t even respond to the recruitment calls. It works. It’s far easier to get ahead of retaining top talent than it is to try to counter-offer once your employees are entertaining other options.

Your unique culture should be celebrated and supported.

As a CEO, I found that culture was the single most important factor in employee retention. Employees understand their market value. They will stay with your company if they feel happy, valued, and making a positive impact. Focus on culture and communicate your company’s uniqueness and value proposition.

Black Duck Software is an enterprise security startup. We created an equity culture and a learning culture. Each employee considered the company their own and was a shareholder. Employees felt that they were part of the company and could learn from it.

To motivate your entire team, it is important to have a distinct culture. Although it may seem counterintuitive, it is possible to reduce costs and still focus on culture. It’s possible because funding unique cultural events is not expensive. It is the thought behind these gatherings that really counts and have an impact on employee motivation. Black Duck held a Star Wars Lego building contest for its software developers. It was a huge success because the participants were able to show their creativity publicly and had fun.

Every company’s culture is different, but now is the time to double down on it. A good culture will help retain talent and ensure that you’re able to make it through tough times.

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Businesses of all sizes need to weather recessions. Startups have a unique challenge, as they must rely on outside capital until they are profitable. Save cash and pay attention to customers, investors, employees and culture to ensure you make it through the tough times and emerge stronger.