Why Starting A Business In A Recession Might Be A Good Idea

While some economic indicators show the economy is still relatively solid, other signs indicate the economy is in or entering a recession. Some startup entrepreneurs have put their plans on hold, waiting to see which way the economy is actually headed. If that’s you, Jake Flomenberg, an investing partner at Wing Venture Capital, a VC company that invests in early-stage startups (seed and Series A), says that’s the wrong move.

And data compiled by MarketWatch suggests he’s right, pointing out that more than half of Fortune 500 companies were launched during a recession, including HP. And companies like Uber, Slack, Warby Parker, and Airbnb all started during the 2007-2009 recession.

Flomenberg says starting a business in the next 12 months is a smart move because:

• There’s less competition. A common recession strategy for businesses is to cut marketing, advertising, and PR budgets. With fewer businesses actively promoting themselves, entrepreneurs that enter the market and invest in promotion strategies face less competition and are more likely to survive the current market conditions.
• VCs still have the capital to deploy, and they’re in search of deal flow. With less competition, the odds of securing capital may be more probable. Seed funding for new startups remains resilient, and North American venture firms have already raised $88 billion in the first half of 2022—which is two-thirds of what was raised in 2021.
• Access to top talent. Since the world has become accustomed to remote and hybrid work environments, it is easier for entrepreneurs to hire top talent and build global startup teams. Furthermore, over 21,000 workers in the U.S. tech sector have been laid off in mass job cuts, leaving top-tier talent searching for new employment.
• Easier to acquire customers. Recessions are known to disrupt and alter consumer trends, often bringing about more problems. The companies that can solve those problems will gain a tremendous competitive advantage.

I talked to Flomenberg about how entrepreneurs can take advantage of this economic turbulence to innovate their businesses and streamline operations cost-effectively.

Are certain businesses more “recession-proof,” making them less risky investments?

Jake Flomenberg: IT and software investments are generally more recession-proof than certain types of consumer discretionary spending. That is not to say there is no belt-tightening within IT and security. However, these software businesses have many must-haves. You have to give your employees healthcare. You have to pay for cloud infrastructure. These aren’t things that companies are likely to change based on the economic climate.

The businesses at risk are those offering “nice-to-have” solutions—the things the businesses, their employees, and consumers can live without.

You mention “streamlining operations.” What specific operations should business owners consider streamlining?

Flomenberg: In 2021, investors rewarded growth, and they did so at virtually any cost. As the world has changed, investors now reward efficient growth and care much more about the bottom line in addition to the top line. So, the real question is, what actions can a business take to drive efficiency into their company? The answer will vary for each company. One business might have a low ROI marketing expenditure. Another might have substantial, manual processes that could be automated. Long term, this will be good for everyone. These businesses will come out more durable and scalable.

Many business owners are wary of taking risks during recessions—they play it safe. Why is that the wrong approach?

Flomenberg: Simply put, the best time to act is when others won’t or can’t. For example, there are some companies that, during times of recession, will pull back on marketing. If you’re one of their competitors, now would be a great time to lean in. Increase your marketing budget and expand your market share; invest in your business and continue to grow while the competitor is at a standstill. Thus, in reality, you might think that pulling back on marketing is safe when in reality, it is the exact opposite.

Do you look for entrepreneurs with specific characteristics that you believe are especially suited to growing a business during a recession?

Flomenberg: One of the most important characteristics we look for in entrepreneurs is what I would call tenacity, as opposed to theater. Some people want to engage in the theater of startups. They like the idea. Perhaps they want to start something, raise a little bit of money, and then get acquired. Those are not the types of entrepreneurs Wing intends to work with.

The type of entrepreneur that we invest in is tenacious. This entrepreneur will do whatever it takes to succeed. If we’re in a recession, those tenacious entrepreneurs will do whatever it takes to keep the business alive, take funding on less than ideal terms, reduce headcount, etc. Building a company from nothing is a tremendously difficult endeavor. In good and bad times, people with tenacity will fare far better than those who don’t have it.

Are there behaviors that business owners adopt during a recession that don’t work when the economy is back to normal? How does a business owner know when to “switch”?

Flomenberg: It’s more about alacrity than “works” or “doesn’t work.” Business owners must keep track of their balance sheet and market conditions and act accordingly. When the market turbulence started, I sat down with all the companies I worked with, and we reviewed their operating plans in light of [these market conditions]. In some cases, we felt we needed to make changes based on the market; in others, we didn’t. We did so with alacrity to set up each company for success. Companies that react more slowly or don’t react at all may find themselves in difficult financial situations, often without the cash or time they need to resolve them.

If the market changes substantially for the better, companies should again review their operating plan and adjust. Companies that act quickly will generally fare better.

This article was written by Riva Lesonsky and appeared on Score.