starting up a business in a recession

19th October 2022

Tips For Building A Successful Start Up In A Recession

Carissa Parnell

The result of recession is, unsurprisingly, not a rosy one for start ups. Even in easier times, launching a new business involves plenty of risk. Most start ups fail.

The aim of start ups is different from other new businesses. Securing outside funding is usually a key component. Rapid growth is practically in the definition of a start up. Sometimes the goal to grow fast and then sell the company is a factor.

Everything that defines a start up becomes far more challenging in the setting of a recession.

Luckily, we have collated some useful strategies which can help give start ups a fighting chance to prosper in a recession.

The State Of The UK Economy And How It Affects Start Up Firms

It’s no secret that the UK is entering some challenging economic times with banks claiming that we are now in recession.

Many economist forecasters are saying that it is a perfect storm of negative circumstances that have brought about the current state of affairs.pound dropping

After a two-year pandemic causing major economic uncertainty and upheaval, we’re greeted by the war in Ukraine, soaring energy prices and a cost-of-living crisis, then the pound dropping swiftly against the dollar and euro after the announcement of tax cuts and more borrowing in the mini budget. Currently, the government also appears to be flip-flopping on economic policy following widespread criticism of the mini-budget. It is not a state of affairs that instils confidence or calm in business owners, entrepreneurs, or investors.

As the UK enters recession, businesses are looking at the hardships of rising inflation, high-interest rates, high costs of energy for running a business, and a wave of expected redundancies to desperately cut costs.

It is already being reported that start ups in particular are struggling to access funding as VCs become more risk averse.

So, how can start ups buck the trend and avoid the grimness of the recession?

Why Is A Recession Sometimes A Good Opportunity For A New Launch?

Now, perhaps overly cautious purse-tightening isn’t your problem.

You might be an entrepreneur who has heard that you shouldn’t be afraid to start a business in a recession or crisis time.

There are factors to support this, for example:

  • There’s less competition as all businesses are playing it safe and fewer are being launched
  • Due to the stated reduced competition, you might potentially get better deals from vendors
  • There could be excess talent around to hire for lower salaries as other businesses make redundancies in the wake of recession to help trim the fat
  • Your business idea could specifically exploit needs borne of the recession or crisis. A prime example would be the boom in health tech firms during the pandemic.

However, let’s for a moment imagine this isn’t the case, or not true for your specific start up, or not a guarantee.

Vendors might not be giving good deals because the energy charges have risen, and they need to cover their costs.

Candidates are emboldened during the homeworking trends of the pandemic and demand pay rises to combat cost of living prices rising.a person working from home with a cup of tea

You might have already launched your start up prior to the recession, rather than as a reaction to exploit a specific niche resulting from it.

If your start up is facing increased challenges in the recession, here are some handy tips for keeping your head above water and sailing into more profitable seas once again.

How To Build A Successful Start Up In A Recession

We know that, according to PitchBook, even in the USA, investments in tech start-ups have plunged 23% over the last three months, which is the steepest fall since 2019. Many economic forecasters believe that the UK is much further along the route to recession due to the energy crisis and proximity to Ukraine and reliance on Russian energy.

Hence start ups who want to survive the recession must employ various cunning strategies to remain in the game.

 

1) Stay Optimistic & Don’t Panic

Recession pessimism is the biggest killer of start ups. Investors are already cautious because of buying into the pessimism. If you also don’t have faith in your plans, product, or idea, it will show to prospective investors.

Staying optimistic in the face of increased financial challenges and uncertainty is the biggest hurdle for start ups in recession.

Despite all the negativity, you will see in the news, previous recessions showed us that Angel investor deals and seed deals remained fairly consistent and did not drop as much as forecasters feared. Deals even rose for some sectors.

You also need to keep morale up among workers and have positive energy to attract your target audience.

 

2) Occupy And Own Your Niche

Find a unique selling point and be an expert in your niche.

There is one particular irritating trend among investors during a recession. It can be frustrating for entrepreneurs because it is contradictory.

Firstly, investors in a recession lean towards tried and tested arenas. Innovation is less favoured than reliable sectors. Yet at the same time, you have to be more competitive as investors are being hyper-selective. You somehow have to be safe and yet utterly unique.

So, when we say ‘own a niche’, it doesn’t mean select a niche so obscure that there’s no demand, but rather be exceptionally educated on your sector and have something that makes you unique to your audience.

This is also useful in attracting buyers as well as investors as they are being more frugal and cautious. They want to trust experts for the products that they definitely need or think they need.

 

3) Keep A Healthy Cashflow At All Times

Easier said than done in a recession, yet it is one of the core components of survival.

There are several ways to manage a healthy cashflow:healthy cashflow diagram

  • Be prompt with your invoicing: stay on top of receivables AKA the money you get from sales.
  • Review your payment terms: Consider shortening the payment window so clients pay you more quickly after receiving your services. Also, consider charging for late payments.
  • Use subscriptions for business services or lease equipment to prevent massive outgoings at once by buying outright.
  • Create a cash flow forecast: it should keep a record of your estimated incomings, outgoings, and projections of those over the next 6-18 months.

 

4) Employ Grassroots Marketing To Create Buzz

There are many different marketing efforts available to start ups and new businesses.

However, the trend in recent years is to put the majority of your budget into digital marketing.

While this is valuable, it can be a saturated market.

Smaller businesses or new launches tend to steer into digital marketing and away from PR or older forms of media because of the expense.

Digital marketing is also powerful because you can target audiences very specifically.

However, for new launches, the often-neglected grassroots efforts can be very effective.

Attending conferences, and networking events can help you make contact with hyper-relevant connections in your industry and do some in-person, one-to-one marketing.

This can be psychologically powerful depending on your industry. It is especially effective for B2B businesses.

Certain sectors have an inner circle and community about them, so getting face time with relevant contacts is a crucial marketing factor if you are newly launched.

Word of mouth from these events can trigger initial momentum.

 

5) Make A Plan B

For a start up there is never any certainty but recession brings greater unpredictability. Make a back up plan for everything:

  • Your funding
  • Your budget
  • Your marketingplan b business plan
  • Your projections
  • Timescales
  • Even your service offerings

There are many start ups that secure huge funding pots but still fold quickly because they did not adjust their plans for the current environment.

 

6) Decrease Your Monthly Spend

Rather than waiting for market recovery, try to cut costs early, even if it means downsizing and getting rid of excesses. Whether it’s staff numbers, culture building, travel, or non-essential resources, be sure what you can cut early.

 

7) Retain & Outsource Rather Than Hire

Onboarding and training cost time and money. Over-hiring too early is a money pit. Focus on retaining your most essential and talented staff. If they are over-stretched, consider outsourcing to freelancers rather than taking on full new hires with their expensive salaries.

 

8) Retain Your Customers

Don’t just look to adding more growth, be sure to keep an eye on the satisfaction levels of current clients and work to maintain a long-term relationship. Give them special offers and listen to their feedback. Facilitate buyer loyalty.

 

9) Invest in Tech

Put some of your budget into strong technological solutions that aid automation and increase productivity.

 

10) Adapt And Change

Be willing to change your service offering, marketing, approach and tactics to see what works in leaner times.

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