I started as an entrepreneur a little over two decades ago – a long enough period to have experienced a full range of market conditions. This includes two notoriously challenging periods:
- In 2000, I founded my first company in a very down economy in the Bay Area – the epicenter of the startup bubble bursting.
- During the 2008 recession, I ran a consumer-facing company which was deeply impacted by the sudden collapse of our particular market.
Both companies not only made it through their respective challenges, but ultimately emerged stronger for the experience. From my perspective, startups which successfully navigate tumultuous markets share two attributes:
Sometimes macroeconomic conditions conspire to take out even the best operated companies for no reason other than unlucky timing. For example, if your startup currently sells either to individual consumers or to other companies which are impacted by the current economic crisis, you’re in for a tough time. By contrast, if this is not the case and your customer base is still healthy and buying your product, count your good fortunes.
A deliberate approach of avoiding unnecessary risks
When money flows freely, it’s sorely tempting to take risks with the implicit assumption that future rounds of funding will always be there for the taking. Now that the market has turned, those who had a less careful approach to operations may find themselves in dire straits.
This includes any startup which:
- lacks extreme discipline with respect to expense management,
- has not achieved a significant milestone such as demonstrable product-market fit, or
- cannot demonstrate a clear path to profitability which includes realistic sales projections which account for the negative impact to the sales cycle.
Startups which exhibit any of these three attributes will find that, just like in 2000 and 2008, it is suddenly a much tougher market to raise additional capital.
At the end of the day, startups live in a Darwinian world. A shock to the market climate accelerates the winnowing, and not always with regards to any sense of fairness. But, on a positive note, startups which enter the downturn in a strong position often have even brighter prospects when the economy improves.