As the economy faces macroeconomic challenges—namely inflation, the rising cost of capital, and changing consumer preferences—startups are beginning to feel the effects. By their very nature, however, startups are uniquely positioned to find opportunity in economic uncertainty. Startups have always embraced change: They innovate beyond the status quo; they stay close to customers and reassess when needed; they scrappily solve problems by reimagining what’s possible; and they use their small size and nimble workforce to take on big, complex challenges in creative, new ways.
What was true about the economy of the past couple years doesn’t always hold true anymore. How can your startup adapt quickly to a changing economy? We met with founders leading startups ranging from pre-seed stage to post-Series D that are doing just that. They’re proactively preparing their businesses, teams, and products for uncertain times within the next few years. To arm you with these founders’ best practices, we organized their advice and experiences into areas that are top-of-mind for founders like you, including how to:
- Raise capital and invest funds
- Hire and retain employees
- Grow your customer base
- Invest in your product roadmap
Over the course of 2021, venture markets saw an oversupply of capital looking for investments. 2022 has seen a comparative crunch, with global venture funding decreasing by 34% from Q2 to Q3—the biggest drop in a decade. The startup founders we interviewed have responded to increasing uncertainty by adjusting when and how they fundraise as well as where they invest their capital.
Raising more money now
Economic uncertainty makes predicting how much money to raise that much more challenging. Max Cho, the cofounder and CEO of Coverage Cat, recommended “raising more money than [you] otherwise would” as a “hedge against potential future fundraising difficulties.” To better weather any potential outcomes that may arise from economic uncertainty, Nathan McCauley, the cofounder and CEO of Anchorage Digital, suggested adding an extra year’s worth of runway on top of your existing fundraising goals.
If the amount you raise is the first question you’re asking yourself, the second question should be when. In timing your fundraise, Arjun Paul, the cofounder and CEO of Zoko, cautioned against waiting to see how the economy settles: “If you find yourself fundraising in response to an economic slowdown, you’re already too late.” Similarly, Max reinforced that we can’t predict when economic conditions will change. “High interest rate environments have persisted for years,” Max said. “If you are uncertain about that, you can hedge by raising more money now.”
A downturn doesn’t necessarily mean that you need to aggressively cut all expenses. However, it should sharpen where you do decide to spend. For example, in previous years, Zoko drove adoption by buying digital ads. To use their budget more creatively, the team at Zoko read competitors’ reviews and identified their unhappiest users. The team then used its marketing dollars to send those same users an attractive promotional offer encouraging them to try Zoko for free.
While venture capital is instrumental in empowering small startups to reshape entire industries, startups with an overreliance on venture capital can struggle to cover their high costs when the economy changes quickly. Building toward profitability can make it easier to weather unpredictable economic conditions. Arjun advised, “Don’t ever rely on outside capital to run your company. Don’t count on being able to raise… there’s no guarantee you’ll be able to raise capital.”
While external labor market dynamics might impact how easy or hard it is to hire and retain employees, startup cultures always have a unique set of strengths that can help them win great talent.
Competing for talent against bigger companies
If you decide to grow your team, it’s important to understand how the economy might be reshaping applicants’ perceptions and priorities. In a downturn, it’s natural for job seekers to gravitate toward stable and established companies. Given their small size and limited track record, startups can seem riskier. To continue to attract talent, Yana Welinder, the CEO and cofounder of Kraftful, recommended structuring roles so that they’re considered a safe bet in the context of an applicant’s career ambitions. “We look to understand what [applicants] are interested in as individuals,” Yana said. “We try to be mindful of what they’re looking for and structure the role to let them build a career in the way they want.”
Building transparency into your culture
Regardless of the economic climate, founders are responsible for setting the tone for their company’s culture by modeling a set of shared values and behaviors. Many of the startup founders we spoke with mentioned how vital it is to reinforce a sense of ownership across their organizations. After all, impact and ownership have long attracted employees to startup cultures. As the economy transitions, however, Kyle Mack, the CEO and cofounder of Middesk, recommended making transparency an integral part of your company’s culture. If you don’t transparently and plainly explain how the new macroeconomic environment is affecting your business, a slowdown risks dragging down morale. “Be transparent about losses and communicate the lessons,” Kyle said. “Most of your employees’ careers have been in a market where everything is up and to the right. They’ve seen so much success… it’s easy for them to forget that the challenges your business is facing aren’t unique to your business. You need to remind people that these challenges are true for the wider market.”
Marketing and sales
In a downturn, marketing budgets are often the first to get cut. However, the founders we spoke with all agreed that there’s currently a unique opportunity to use their marketing dollars to generate more revenue for less while gaining a competitive advantage during uncertain times. Haseeb Awan, the founder and CEO of Efani, has seen “the cost per click on Google ads decline by 50% because competitors are spending less on advertising.” Arjun and the Zoko team are not only benefiting from the cheaper advertising costs, they’re also doubling down on marketing as their competitors step away from it. “We increased our marketing budget,” Arjun said. “You’ll get 4x more juice out of it because competitors have cut down on [marketing].” If you plan to continue investing in marketing, consider how you can deploy your budget for maximum effect.
Repositioning around return on investment
Businesses are facing pricing pressure on multiple fronts. As their expenses increase, many businesses are raising prices in step with inflation. Their customers are also looking for goods and services that offer meaningful value at a reasonable price, and where possible, trying to renegotiate pricing to fit their tighter budgets. To give your startup the flexibility to increase prices and the credibility to appeal to value-conscious customers, Nathan of Anchorage Digital believes it’s important to underline how your product either helps customers make more money or reduce their expenses. “If [your positioning] doesn’t connect to customers’ bottom line, you’re going to have a harder time selling to them,” Nathan said.
For example, Zoko has positioned their business as a revenue center, rather than a cost driver, by calculating and displaying in product how much customers earn on the platform relative to their spending. According to Arjun, their customers recover anywhere from 100% to 300% of what they spend on Zoko. “If you are a revenue center, you are not on the chopping block during a downturn.”
Leaning into one acquisition channel
To stretch their marketing budgets and lower their customer acquisition costs, a number of the founders we interviewed reinforced the importance of undergoing strategic planning to identify one successful acquisition channel and perfecting the approach for that channel. For example, Haseeb constantly evaluates “which channel brings in the most clients” for Efani and doubles down on that one. Similarly, to make their marketing more efficient and streamlined during uncertain times, Yana and the team at Kraftful “narrowly focused on channels where buyers would be spending time… the majority of outreach is now on LinkedIn.”
Depending on the stage of your startup, your product team may be pulled toward deepening your existing capabilities or broadening into new areas. Our founders advised that startups searching for product-market fit should maintain a relentless focus to make the most of their leaner teams and budgets. Later-stage startups, on the other hand, have the strategic flexibility to diversify into new revenue streams to strengthen their organizations against macroeconomic obstacles and market-specific shocks.
Focusing on product-market fit
According to the founders we talked to, startups that thrive during the next few years will have a relentless product focus—both in terms of who they serve and how they serve them. Defining your specific target customer is a balance of understanding who your product resonates with and where the biggest economic opportunity is. While Kyle of Middesk underlined the importance of “focusing on the segments that you have the most success with,” Yana of Kraftful reinforced that it’s also crucial to “segment and understand which customers are most likely to survive.” Focus is similarly vital when prioritizing a long list of feature requests. While innovation is important, Kyle advised “building must-have features” in order to focus your engineering team’s limited bandwidth.
Diversifying into new revenue streams
Once you’ve built a sustainable core business, Nathan of Anchorage Digital acknowledged that “you earn the right to branch out into new revenue streams.” Serving new customer needs and expanding into related capabilities can help you mitigate risk and better weather economic uncertainty. That being said, for small businesses that are just getting started, Nathan recommends waiting to diversify: “Stay maniacally focused on the thing that your product does well.”
What you can do today amid increasing uncertainty
No one can predict what the next few years will bring. While questions about the economy’s future might weigh heavily on your startup right now, Max of Coverage Cat warned against dwelling on the unknowable future:
Wayne Gretzky has that famous quote that’s influenced a lot of people. ‘Skate to where the puck is going, not where it has been.’ The macroeconomic climate is like an invisible puck that you could never have seen to begin with and it’s doing whatever it wants. If you think you’re skating to where the puck is going, odds are you’re wrong… most founders would be better off asking themselves, ‘What can I do today?’ Focus on making your business and product great. If you’re a startup, that’s never going to stop being important.
Kyle of Middesk also saw a silver lining to the world’s current economic challenges. He appreciated that increased uncertainty offers a unique opportunity to sharpen an organization’s focus. “A lot of great companies are built in times like these,” Kyle said. “You’re forced to really focus on the fundamentals of your business.”
As unstable as the economy feels right now and as unpredictable as its future is, small businesses play an invaluable role in creating a more prosperous, dynamic world economy. Nathan of Anchorage Digital said it best: “It’s extremely important that people who can build companies do. New companies and new innovations are what drive our economy forward.”