TRC 030: Downturns are a great time to start a business

Read time: 5 mins

Sounds nuts doesn’t it!

Starting a new business at a time where funding has disappeared from the market.

I became Managing Director of a new adtech business 3 months after the NASDAQ crashed in 2000, and started my first business just over 2 years later when it it didn’t really feel like the market had changed.

At the time, there were always reasons to feel nervous.

With hindsight, as long as we didn’t run out of cash (we nearly did - more due to our own mismanagement than the market), it was actually launching at this time that helped us on the road to success.

It feels counterintuitive, but there are actually many great reasons to get started in a downturn:

1. Increased Focus on Fundamentals: During a downturn, particularly one where capital is scarce, businesses are forced to focus on their core value proposition and efficiency. This can lead to the development of a more sustainable and leaner business model, relying on your own ability to master sales as opposed to relying on external funding for growth. These capabilities are the bedrock of any great business.
2. Opportunity to Innovate: Economic downturns often shift market needs and consumer behaviours (our first business definitely benefited from the ‘switch to digital’ advertising after the global financial crisis). This can create opportunities for innovative solutions that may not have been evident or necessary during more prosperous times when inertia means people are more likely to stick to the status quo.
3. Better Talent Availability: A downturn often leads to layoffs (big tech are not quite the hiring machines they were), which means a larger pool of available talent. This can mean access to hiring skilled employees who might have been inaccessible during a boom.
4. Lower Costs: The cost of starting a business can be lower during a downturn. For example, equipment and office space might be cheaper, and suppliers may be more willing to negotiate favourable terms.
5. Building Resilience: Starting a business in a challenging environment can build resilience and adaptability. If a startup can survive and even thrive during tough times, it is likely to be stronger when the economy improves. You definitely will be.
6. Long-term Investor Relationships: Starting a business during a downturn can help in building long-term relationships with investors. Those who are willing to invest during tough times are likely to be more committed and supportive in the long run.
7. Proving the Business Model: If a business can attract customers and generate revenue during a downturn, it's a strong indicator of the viability and appeal of its product or service, which, should you need it, will make raising capital easier. Traction is one of the killer apps for fundraising.

Like most things that make you feel that you are going against the grain, it won’t necessarily feel like an automatic or comfortable choice.

But if you can keep a tight leash on your cash-flow and find a way to get to sales, you will have a stronger business in the end.

As Warren Buffet says, it pays ‘to be fearful when others are greedy and to be greedy only when others are fearful.’

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