The term “recession” strikes fear into the hearts of both business owners and investors. It is a period of the economic downturn in which the GDP (Gross Domestic Product) shrinks, business revenue falls, and unemployment rates rise.
While the global economy has experienced several recessions, there are concerns that another one will occur in 2023. Startups must understand the potential impact a recession can have on them and take proactive steps to prepare for it.
This blog will investigate the impact of the recession on startups and provide actionable steps that startups can take to mitigate the effects of the recession.
What is a recession?
The term “recession” refers to a significant drop in economic activity that lasts an extended period, typically more than six months. It is characterised by a drop in GDP, high unemployment rates, decreased consumer spending, and a general economic slowdown.
Several factors can cause a recession, including a financial crisis, global economic insecurity, or a drop in consumer confidence.
Businesses and individuals may struggle to maintain their financial stability during a recession, and the government may implement policies to stimulate the economy and mitigate the recession’s impact.
The potential of a recession in 2023
The Centre for Economics and Business Research (CEBR) and many other agencies predict the global recession will begin in 2023. New borrowing costs imposed to combat inflation may cause several economies to contract.
According to the annual World Economic League Table published by the British consultancy, the global economy surpassed $100 trillion for the first time in 2022. However, the growth will halt in 2023 as governments struggle to keep up with rising costs.
The researcher’s findings are more pessimistic compared to the recent IMF forecast. According to Bloomberg, this organisation warned in October last year that more than one-third of the world’s economies will crumble. They also predicted a 25% chance of the global GDP growing by less than 2% in 2023, indicating a global recession.
By 2037, the global GDP will have doubled as developing nations catch up to wealthier ones. According to Bloomberg, the East Asian and Pacific region will generate more than a third of global output by 2037, and Europe’s share will fall to less than a fifth due to shifting power dynamics.
CEBR bases its estimates of growth, inflation, and currency exchange rates on data from the IMF’s World Economic Outlook and an internal model.
Impact of the global recession on India
- According to the report, the Indian economy will reach $10 trillion by 2035 and rank third globally by 2032.
- Because the United States is one of the world’s great powers, a moderate or severe recession will have global ramifications.
- According to recent data, tech companies around the globe, including India, will fire over 1,600 employees per day in 2023. These mass layoffs are becoming more common as concerns about a global recession and slowdown rise.
In the initial 15 days of January this year, 91 companies laid off over 24,000 tech workers, indicating bleak times ahead. According to data from Layoffs.fyi, over 1,000 companies laid off more than 1.5 lakh employees in 2022.
- The crisis eventually grew and spread into a global economic shock, leading to several European bank failures, falls in several stock indices, and significant drops in the value of the Indian market.
- Given that Indian firms had sizable outsourcing agreements with US clients, a slump in the US economy was unquestionably bad news for India.
- India’s exports to the United States have increased over time. However, India was impacted and survived the severe financial crisis of September 2008.
Importance of understanding the impact of the recession on startups
Understanding how a recession affects startups is critical for several reasons.
- Startups are particularly vulnerable during a recession due to their typically limited financial resources, smaller customer base, and lack of established brand recognition.
As a result, they may be more prone to be affected by a recession, such as decreased consumer spending and reduced funding availability.
- Secondly, startups are drivers of innovation and economic growth. They are accountable for the creation of new jobs, the disruption of established industries, and the contribution to economic development.
However, startups may struggle to survive during a recession, which can significantly affect the economy.
- Thirdly, startups can be positioned in a manner to help them weather a downturn and emerge stronger on the other side. Startups can not only survive but potentially thrive in the face of economic adversity if they understand the impact of a recession and take proactive measures to prepare for it.
Understanding the impact of a recession on startups and the broader economy is critical for their survival and success. Startups can prepare to navigate the challenges of a recession and emerge stronger on the other side by being aware of potential risks and implementing strategies to mitigate them.
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Impact of Recession on Startups
A recession can significantly impact startups, and entrepreneurs must understand the potential challenges they may face.
The following are some of the most significant ways in which a recession can affect startups:
1. Decreased consumer spending and demand
Consumers tend to tighten their belts and cut down spending during a recession. It has the potential to significantly impact startups that rely on consumer spending, particularly those in the retail, hospitality, and entertainment industries.
To maintain customer demand, startups may need to adjust their pricing strategies, offer discounts or promotions, or pivot to alternative revenue streams.
2. Reduced availability of funding
Another issue that startups may encounter during a recession is access to funding.
Traditional funding sources, such as banks and lending institutions, may become less willing to extend credit to startups as investors and venture capitalists become more cautious.
To keep their operations running, startups may need to look into alternative funding sources such as crowdfunding or angel investors or seek government grants or loans.
3. Increased competition and consolidation
Many businesses may struggle to survive during a recession, resulting in increased competition for customers and market share.
Furthermore, large corporations may use the economic downturn to acquire smaller startups, resulting in industry consolidation.
To compete in this environment, startups may need to prioritise differentiation, innovation, forming partnerships, and building networks.
4. Strategies for surviving a recession
Despite the difficulties of a recession, there are strategies that startups can employ to improve their chances of survival.
These include diversifying revenue streams, cutting unnecessary expenses, developing contingency plans, leveraging technology to increase efficiency, and emphasising customer retention and loyalty.
Startups can mitigate the impact of economic adversity and emerge stronger on the other side by being proactive and taking steps to prepare for a recession.
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Steps Startups Can Take to Prepare for Recession
Startups can take several proactive steps to increase their financial stability and mitigate the impact of economic adversity to prepare for a potential recession.
The following are some strategies for startups to consider:
1. Diversify revenue streams
Diversifying revenue streams is one of the most effective ways for startups to prepare for a recession. It could entail entering new markets or product lines, devising alternative pricing models, or investigating partnerships and collaborations.
Startups can reduce their reliance on a single source of income and increase their resilience to economic fluctuations by diversifying their revenue streams.
2. Cut unnecessary expenses
Another critical step for startups is to review their expenses and eliminate unnecessary costs. It could include renegotiating supplier contracts, cutting marketing or advertising costs, or restructuring staffing and operations.
Startups can increase their financial flexibility and weather a recession by cutting unnecessary expenses.
3. Develop contingency plans
Startups should also consider creating contingency plans in case of a recession. It may entail identifying alternative funding sources, developing scenarios for various levels of economic downturn, or developing strategies for adjusting operations and staffing.
Startups can be better prepared to respond to changing economic conditions by planning for the future.
4. Leverage technology to increase efficiency
Technology can be a powerful tool that can help startups increase efficiency and lower costs. They can utilise automation, artificial intelligence, and other technologies to streamline operations, improve customer experiences, and reduce overhead.
By leveraging technology, startups can gain a competitive advantage and position themselves for success during a recession.
5. Focus on customer retention and loyalty
During a recession, startups must focus on retaining customers and building loyalty. Startups should prioritise delivering high-quality products or services, providing exceptional customer service, and developing strong customer relationships.
Startups can increase revenue and position themselves for long-term success by cultivating customer loyalty.
To summarise, while a recession can present significant challenges for startups, taking proactive measures to prepare for it can increase their chances of survival and even position them for long-term success.
Startups can increase their financial stability and resilience to economic fluctuations by diversifying revenue streams, cutting unnecessary expenses, developing contingency plans, leveraging technology, and focusing on customer retention and loyalty.
Examples of startups that have successfully navigated recessions in the past
Studying case studies of startups that have successfully navigated recessions in the past can provide valuable insights and lessons for entrepreneurs looking to prepare for it in 2023.
Here are a few examples of startups that have survived economic downturns and emerged stronger:
In 2008, Airbnb, the online marketplace for short-term accommodations, was founded when the global financial crisis was at its height.
Despite the challenging economic conditions, not only did Airbnb survive, it thrived. Some of the factors that contributed to its success are as follows:
- Alternative to hotels at a low cost: During a recession, people tend to cut back on spending, including travel. Airbnb provided a low-cost alternative to traditional hotels, making it an appealing option for frugal travellers.
- Opportunity for extra income: During the recession, many people struggled to make ends meet, so Airbnb provided a perfect opportunity to earn extra money by renting out a spare room or their entire home.
- Innovative business model: Airbnb’s unique and innovative business model allowed it to stand out in a crowded marketplace. The company used the internet and social media to build a community of hosts and guests.
- Focus on user experience: From the start, Airbnb prioritised user experience, making it simple for hosts to list their properties and for guests to book them. This emphasis on user experience contributed to the company’s customers’ trust and loyalty.
- Flexible cancellation policies: During a recession, people hesitate to make travel plans due to financial uncertainty. Airbnb’s flexible cancellation policies, which allow guests to cancel up to 24 hours before check-in, made booking accommodations less risky for travellers.
- Strategic partnerships: Airbnb formed strategic alliances with companies such as Craigslist and Facebook, which aided in expanding its reach and attracting new customers.
After the 2008 recession, Slack, the popular workplace communication platform, was founded in 2013. However, it did face difficult economic conditions in its early years of development.
Here are some of the factors that helped Slack survive the recession:
- Addressing a pressing need: Slack’s messaging platform addressed the crucial need for improved workplace communication and collaboration, making it an appealing solution for businesses looking to improve efficiency and productivity while keeping costs low during a recession.
- Innovative features: Slack introduced innovative features such as channels, direct messaging, and integrations with other tools. These features enabled teams to communicate and collaborate effectively with each other, resulting in increased productivity and efficiency.
- Strategic partnerships: Slack formed alliances with other companies, including Google and Dropbox, to expand its reach and attract new customers.
- Cost-effective pricing: Slack’s pricing model was cost-effective, with a free plan with limited features and paid plans with additional features. It made it affordable for businesses of all sizes and budgets, including those looking to cut costs during a downturn.
- Focus on user experience: Slack’s strong emphasis on user experience makes it simple to use and customisable. This emphasis on user experience contributed to the company’s customers’ trust and loyalty.
Uber is a ride-hailing service founded in 2009. The company experienced significant growth in the early 2010s but faced a major challenge during the 2016-2017 global economic downturn.
Uber changed its business model several times to survive the recession. Here are some of the ways Uber shifted its business model to weather the recession:
- Expansion into new markets: To increase its revenue, Uber expanded into new markets such as food delivery and freight transportation. Due to this, Uber generated revenue from sources other than ride-hailing by diversifying its services.
- Reducing operational costs: Uber implemented cost-cutting measures like reducing driver incentives and streamlining its operations to reduce costs.
- Partnerships: Uber partnered with other companies like car rental companies to expand its reach and provide more services to customers.
- Focus on profitable markets: Uber focused on expanding its services in profitable markets while withdrawing from markets where it struggled to make profits.
- Improving customer experience: To retain and attract new customers, Uber has worked to improve the customer experience. It included initiatives such as improved driver training, improved app user interface, and the addition of new safety features.
- Investment in autonomous vehicles: Uber invested in developing self-driving vehicles to reduce costs and improve efficiency. This investment may reduce the company’s reliance on human drivers in the coming future.
Key lessons and takeaways
Some of the lessons one can take from these case studies are as follows:
- The value of adaptability and willingness to pivot: To survive a recession, startups may need to adjust their business models or adapt strategies to better align with changing market conditions.
- The importance of focusing on customer needs: Startups can increase their chances of success during a recession by understanding and meeting the needs of their customers.
- The significance of creativity: Companies that can innovate and develop new solutions or products during a recession can gain a competitive advantage and position themselves for long-term success.
Startups can increase their chances of survival and emerge stronger on the other side by learning from the experiences of others and applying these lessons to their businesses.
On a concluding note
To summarise, a recession in 2023 could significantly impact startups; however, with careful preparation and strategic planning, entrepreneurs can position their businesses to weather the storm and emerge stronger on the other side.
Entrepreneurs can increase their chances of success in a challenging economic environment by understanding the potential impact of a recession, identifying key survival strategies, and studying case studies of successful startups that have navigated economic downturns in the past.
Diversifying revenue streams, cutting unnecessary expenses, developing contingency plans, leveraging technology to increase efficiency, and focusing on customer retention and loyalty are some steps startups can take to prepare for a recession.
Startups can not only survive a recession but also position themselves for long-term success by taking these steps and being willing to pivot and adapt to changing market conditions.
Finally, while a recession is never easy, startups can survive and thrive during difficult economic times. Startups can navigate a recession in 2023 by being proactive and strategic in planning and execution, hence, emerging stronger and more resilient than ever.