Companies can flourish and outperform rivals if the groundwork is laid out correctly. Research of three historic downturns found that 9% of companies come out of recession stronger than ever, meaning that despite fears of hardship, companies have the opportunity to survive and thrive in economic uncertainty.
How do early-stage tech companies prepare for the headwinds of 2023 and stay afloat during these times of high-interest rates, inflation, slower investment volumes, and more demanding investment criteria? It takes hard work, dedication, and creativity. However, it is an opportunity for the best companies to find ways to grow profitably!
The most significant cost savings areas are office space and headcount. If you can’t get out of a lease, sub-lease as much spare space as possible, and see if you can earn a margin on the sublet to cover things like internet, facilities, and cleaning.
As for headcount, now is the time to reduce excessive “fat.” Be careful not to cut too deep into the “muscle” and your ability to execute your plan. Reduce your team to keep the core talent that meets or exceeds your expectations. You will not see much degradation in output with a RIF (Reduction in Force) of 10-15%, and productivity will often go up! Reduce the workforce as a single event to avoid prolonged uncertainty amongst the remaining staff. Once you've done the office and staff trimming, it's about auditing time and expenses and becoming a lean fighting machine!
Finding ways to examine non-critical costs, renegotiate supplier contracts, and streamline or automate processes to create a lean organization. If suppliers are eating into gross margins, negotiate hard to decrease COGS and consider alternative vendors. Beyond cutting expenses, consider how the company can conserve cash by negotiating longer payment terms with suppliers, offering customers quick-pay discounts, and exploring factoring with long-term customers.
Consider outsourcing or automating some research and development during recessions to reduce fixed salary cost. To streamline processes, cut overhead costs without impacting the quality of the product or service. Less equipment is needed because fewer people are working on new products.
A startup's survival in a recession depends on how quickly it can cut costs, find new revenue streams, and understand how to offer its customers quick ROIs. Be creative and decisive in the approach to cost-cutting and revenue generation without compromising quality.
Before making any changes, ask the question: "How does this affect our core values, and how can we make things better with less spending?" Cutting travel expenses and having digital meetings can be more productive. Fewer meetings and keeping meetings under 20-minutes will encourage focus and result in less time wasted on unproductive activities.
Take a hard look at the monthly business expenses and determine whether they're all essential to the bottom line and, more importantly, if they're driving growth by generating sales or speeding up product delivery. Defer or pause subscriptions or memberships to quickly make cuts to cash expenses. If the company has been paying for staff’s breakfast, lunch, or dry cleaning, ask yourself if this is necessary to attract and retain the best talent. Now is the time to examine the ROI on those items. It all adds up.
Get creative with cash flow and ask your financial controller which fixed costs can be swapped for variable costs. Reducing the fixed salaries of your sales team by offering them a higher sales commission can be an attractive offer to A-list salespeople. Service-based companies might employ contractors to swap fixed costs for variable costs, especially if performance-based compensation structures are implemented.
While immediate action focuses on cost-cutting, look at the opportunity to review and raise prices to improve EBITDA margins. It's not unusual for CEOs and sales execs to feel nervous about increasing costs, but it's an actual test of the value delivered to customers.
Most clients expect prices to increase during an inflationary macroeconomy. Focus price increases on clients with high retention and low churn, which is a good sign that you are delivering a mission-critical service. Explain to customers that prices are adjusted to the general inflation rate and allow you to continue providing a quality service. Always aim for value-based pricing.
Consider re-packaging your offering to deliver more value while retaining or increasing your price points. Instead of lowering your price, add more to the offering and ensure the customer feels it’s a good deal with an expiry date. Offer longer contract times with a reasonable discount to ensure that you mitigate churn. Help the customer understand how reducing their monthly expenses by committing to your service is similar to mobile operators offering lower price plans and even providing discounts on phones and data. Most importantly, focus on the message that helps your customers become more efficient and productive, the thing that matters most in a downturn.
Evaluate offering better payment terms for customers looking to improve their cash flow. At the same time, explore ways to use factoring and other financial services to help you deliver a more attractive proposition to customers without taking a hit on cash flow. Note that there are now specialized financial services for SaaS companies that offer to pay you up-front for longer SaaS contracts.
Whether you're in a recession or not, companies need to find new revenue streams. The best time to look for them is when times are good and when you have cash and time — but as “crisis is the mother of all inventions,” many of the best business ideas are often born during recession times.
Start by focusing on your customers, especially the CFO, who will now be the “sheriff in town” and block any non-critical investments. Review your offering and how it can provide “hard-dollar” benefits that can be measurable and presented to a CFO. Break down your solution into smaller packages that are easier to buy, fast to implement, and quick to repay on the initial investment. Challenge yourself to see if you can offer an “inside one-quarter ROI” packaging of the solution! No CFO can ignore a good deal!
Maybe you can also offer to take over a complete function from your customers and offer it back “as a Service” at a much lower price (so-called Business Process Outsourcing - BPO). Great companies don't just create products or services that people want; they also serve an unmet need by delivering something better than what's currently available.
When thinking about new opportunities, it's easy for businesses to get caught up in what might be popular, but those are short-term solutions. Instead, interview your customers and ask them about their “Pain Points.” Look at where there is room for improvement in your existing customers' industries, also considering how emerging technologies such as generative artificial intelligence (AI) or self-service apps might be able to help your users do business with fewer resources.
You may consider delaying further investment in your product as you fight to lower operating costs, win new customers, and generate recurring revenues during the recession. This is a dangerous path for an early-stage tech company, as one of your core drivers is to disrupt and challenge incumbents with innovative products and services.
It’s tough if you are still cracking your "Product Market Fit" and need more time to get sales traction. Use the recessionary times to engage in even more honest discussions with potential customers about your product, and don’t stop investing in your solution!
Modifying your product and or go-to-market strategy as you gain a better and more intimate understanding of customers’ problems and how to solve them. Ideally, seek funding from your closest customers to improve the product, giving them influence over the solution and a first-mover advantage.
And only invest in more sales resources once you have reached PMF. Selling in early-stage companies is more of a business development effort that is best done by founders.
Paid ads can be out of the question during a recession, especially in a business’s early stages. Organic marketing opportunities can generate long-term benefits. In-house content marketing, like thought leadership, e-books, email newsletters, and blogs, is a great place to start. These resources showcase a company's knowledge base, especially in a B2B SaaS business where it's all about building trust and credibility.
Strengthen this with a solid SEO strategy, and companies can organically grow their reach. It's not an overnight success story, but dominating keywords is worth it in the endgame.
B2B businesses can learn from more modern B2C practices regarding engaging users and driving traffic to websites for conversion. Remember that many of your business buyers are now millennials, and strategies for marketing that worked ten years ago might be less effective today. Consider becoming a Product-Led-Growth (PLG) company where the potential customer can self-serve their way through to becoming a paying customer.
Social media marketing is another free option for companies looking to establish a market presence. Finding a niche, staying on top of trends, and interacting with followers and customers on forums allows companies to interact with target audiences.
Regularly evaluate user behavior and behavior changes during a recession. Adapt the product to customers' needs to continue to provide value. Consider offering more value at a lower cost on a limited-time basis to keep principal clients engaged. Put the users and clients at the center of your actions.
One more thing!
You might depend on existing investors and shareholders to support you during recessions. Be sure to inform them well in advance of any need for new capital and use their experience in navigating these challenging times.
Provide monthly updates on the most important KPIs and how you are performing against the plan. No investor likes to be surprised, and the worst thing you can do is to ask for cash with short notice and no underlying information or history of providing investor updates.