Impact of Economic Slowdown on Startup and How to Survive

✍️ Opinions

Varun Bhardwaj

Oct 10, 2024 — 5 min read

Impact of Economic Slowdown on Startup

This article has been contributed by Sanjay Sehgal, Founder, Chairman and CEO, MSys Technologies.

An economic slowdown can impact startups and businesses negatively. But it can also present some unique opportunities that can make a startup survive and thrive during a crisis.

For any business, “recession” is the most feared word. By definition, a recession is two consecutive quarters of negative economic growth. There can be multiple reasons for this decline. However, the result for a business is almost the same. The economic slowdown is inevitable. However, this does not mean that navigating through the changed consumer behavior and uncertainty in the labor market will be easy.

However, if a business is strategizing beforehand and focusing on long-term goals, it will help it adapt to the changing environment of the market. A business might even emerge stronger and more resilient after weathering the recession.

What is an Economic Slowdown?

A recession or an economic downturn is a period of slow economic growth, which includes declined GDP, a low growth rate in the job market, declining global demand, reduced credit availability, and increased cost of borrowing. The effect of recession is notable on both businesses and individuals, creating financial bubbles and often having negative effects on society at large. The looming fear of unemployment and hoarding habits, to name a few.

The Most Common Causes of an Economic Slowdown

There can be various factors, even a combination of multiple factors, that can result in a recession in a country or a region for a specific period.

While high interest rates can help manage inflation, this can result in declining borrowing rates for both businesses and individuals, which results in reduced investment and spending.
Financial bubbles created by rising stock prices, real estate, and commodity prices can evaporate with time. This can cause a sharp contraction in the economy.
A financial crisis in the country can lead to a recession, which can have a direct effect on businesses, big or small.
Natural disasters or pandemics are unforeseeable circumstances that can lead to economic slowdown. The recent COVID pandemic has caused the door to close for many small businesses and startups.

Direct Effects of Recession on Startups

Economic slowdown can translate into risk increases, reduced cash flow, and many other obstacles for businesses, especially startups. According to the reports of TICE, India’s startup news streaming OTT platform, 50%–70% of startups, backed by venture capitalists, had to stop operations in 2023. In fact, this platform says that the first quarter of 2024 is worse than 2023 in terms of companies closing doors due to the economic slowdown.

For a startup, getting the funding is crucial. During a recession, this can be severely affected. Venture capitalists might reduce their funding, which will directly affect startups.
Raising funds from other sources can be difficult too. For seed funding or bootstrapping, the recession is not a good time to make a crucial financial decision.
Owing to the decreased cash flow, startups might have difficulty managing their operations, manufacturing processes, and delivery.
While the recession affects business and investment, it also changes individual consumer behavior effectively, resulting in reduced leads and sales.
Businesses might experience longer exits during an economic crisis.

However, it is not all this bleak. There can be some opportunities too for startups during a recession.

Due to the economic slowdown, the otherwise cutthroat market becomes less competitive. With proactive planning, startups can get an edge in this situation.
Owing to the reduced demands, startups can get better deals from their vendors, which will help them save more while running the operations and manufacturing.
To keep up with the changed consumer purchasing behavior, startups can offer attractive deals, which will get them more business and sales.

Strategies to Survive an Economic Slow Down and Grow Faster

When it comes to the economic slowdown, having proactive strategies can help businesses in many ways. While survival becomes the priority during such times, the goal should be not only to survive but also to thrive.

Preparing a Financial Plan for Crisis

Proactiveness requires a firm to prepare the company to handle the shock and downside of any crisis. So, to manage the effects of the recession, a startup must have a financial plan. This will help the business to thrive even during the economic slowdown. The steps for this should include:

Complete evaluation of the monthly spending
Ensuring that the business has an emergency fund for such situations
Active and regular analysis of the cash flow and investment
Developing an alternate revenue plan for this situation
Regular debt clearance, especially the highest ones

Reduction and Cost Efficiency

Cost efficiency is not just about reducing costs but also optimizing the resources that are available to achieve the best results in any given situation. Cost efficiency will help the business preserve cash, maintain a regular chain of profitability, and finally keep the operations uninterrupted.

Leveraging technology can help a business reduce the cost of wages and benefits of resources. In this way, operations can be streamlined and human resources can be used to perform high-value tasks. While core competencies can be managed by the business itself, some work that does not require the core competencies can be outsourced.

Innovation and Diversification

Innovation is key to helping a business adapt to adverse market conditions, find a competitive edge, and deliver to the ever-evolving expectations of the customers. While startups often focus on only one business model, innovation can help bring in more products and services that can generate a steady revenue flow for the business. For example, during the recession in 2001, Apple moved forward and launched iPods instead of scaling back, which resulted in massive success and helped the brand build more recognition and customer loyalty.

Diversifying the products and services will help a business weather the storm of an economic slowdown. New strategies, a broader scope for products, and more revenue will help the company keep afloat. In 2008, Netflix transformed itself from a DVD rental service to a streaming service that catered to the changing demands of the customers, effectively making the brand a market leader in online streaming.

Focus on Customers

Most importantly, for any business, the focus should be on the customers and their demands. The aforementioned brands could become pioneers as they anticipated the needs of the potential customers and catered to them at the right time. This requires constant market research, understanding the changing buyers’ persona, having clarity of the problem that your customers are facing, and creativity to solve that problem. No matter what a business does, the customer is always God.

To wrap it up, every storm comes with a silver lining. Even in the middle of an economic downturn, brands have proved their mettle by finding opportunities for growth that helped them rise even during financially unstable times. Hence, constant innovation is the way to go. The focus should be to come out on the other side of the storm as much stronger and bigger.