How Business Cycles Affect Start-Up Companies

Start-up businesses are affected by a wide variety of factors. Macroeconomic factors such as business cycles affect start-up organizations as much as they affect any other businesses. In fact, since start-ups are in a nascent stage, they face a bigger impact from these business cycles.

Start-ups that face recession or slowdown early after their inception have a significantly lower probability of survival. In this article, we will have a look at the various business cycle-related factors which impact start-ups.

1. Flight to Safety: The first and most obvious impact of a recession or a slowdown is the fact that the amount of surplus investment funds in the market gets reduced. This is because, during a recession, the amount of money supply in the system is reduced. Also, there is a general tendency of “flight-to-safety”.

   Investors all over the world try to liquidate risky assets and buy safer assets such as treasury bonds and gold in order to survive the recession. Now, start-ups are rightly considered to be one of the riskiest asset classes. Hence, during a recessionary scenario, investors are less inclined to provide more funds to such businesses.

   In fact, some investors may even try to liquidate their existing investments in order to cover their losses from other investments.

   The problem is that start-up businesses survive on funding. Usually, start-ups only raise enough capital that they can reach the next milestone. Hence, start-ups often have to agree to a down-round and give away a huge stake of their business for a small capital inflow during the recession. This is the reason that many start-up founders reduce their burn rate so that they can make the same funds last longer and avoid raising funds during a recession.

2. Labour Markets: Start-ups operate in multiple markets. They sell products to consumers. However, they also buy services from employees in the labor market. In the event of a recession, a lot of highly skilled people are left without jobs.

   For the start-up, this can be a golden opportunity. Start-ups are able to access top talent at a discount during the recession. Once the market gets better, a lot of these people do quit their start-up jobs and go back to their highly paid corporate jobs. However, start-ups have utilized the services of such personnel in order to train their other associates and improve the quality of their service. If a start-up has enough funds on hand, it can recruit the best talent in the market and set up a great foundation for its business.

3. Focus on Guerrilla Marketing: All start-up companies are not able to survive a recession. This is because a recession is a test of the marketing practices of a start-up company. In the event of a recession, most start-ups cannot afford to have big marketing budgets. Hence, expensive marketing strategies are out of the question. Start-up companies have to employ guerrilla marketing strategies in order to get the maximum bang for their buck.

   It is common for companies to stop mass media advertisements during the recessionary phase. Instead, companies resort to event marketing and social media-based marketing which have a lower cost and have the potential to provide a higher yield. Guerrilla marketing requires a different skill set as compared to traditional marketing activities. Companies that are able to adapt to such marketing techniques are the ones that have a higher chance of survival.

4. Less Competition: Reduced competition is one of the perks of an economic downturn. During a recession, start-up companies that offer nice to have value propositions find it difficult to survive. This is because consumers try to reduce and unnecessary expenses. However, start-up companies that offer a mission-critical must-have value proposition do not witness a very large dip in sales revenue. Hence, if these companies are well-funded, they can consider the downturn to be an opportunity wherein they can continue to grow unchecked because of less competition.

5. Supply Chain Optimization Possible: Many start-ups use recessions in order to optimize their supply chain. This could mean that the start-up may use the opportunity to obtain more favorable payment terms. Often, these payment terms are locked in for a longer duration and continue to benefit the start-up even after the recession is over. Also, start-ups are able to obtain the services of high-quality vendors at lower prices.

The bottom line is that business cycles have a huge impact on start-ups. Some of the impacts are negative whereas the others are positive. Start-ups have to closely manage this impact to increase their chances of surviving the recession.