History tells us that downturns are a time of creative destruction. A downturn in the economy forces companies to find new ways of doing things, to be more efficient, and to find new markets. A downturn also offers opportunities for new companies and entrepreneurs to enter the market with innovative ideas and solutions...
The tech industry’s exuberance has collided with economic reality and economic reality has well and truly won. The party is officially over. The layoffs begin.
According to tracker website Layoffs.fyi, global tech job losses so far this year have exceeded 120,000 people across more than 780 companies. And over the past couple of weeks alone, disappointing quarterly results at many big tech companies as well as layoff announcements from the likes of Meta, Twitter and Stripe, sent the broader tech industry spiraling further downward into correction territory.
While downturns are hard times, there will be continuing strong demand for tech talent across a range of industries. Given the scale of the layoffs, there is likely to be two divergent paths for workers that have been recently let go. As the market signals a strong preference for companies with profitability versus growth at all costs, most workers will go to companies that are less exposed to the downturn. However, there will also be a small cohort of workers that throw caution to the wind and decide that now is the perfect opportunity to become an entrepreneur and start a new business.
History tells us that downturns are a time of creative destruction. A downturn in the economy forces companies to find new ways of doing things, to be more efficient, and to find new markets. A downturn also offers opportunities for new companies and entrepreneurs to enter the market with innovative ideas and solutions – think Airbnb, WhatsApp and Twilio – all companies that started in the last downturn.
In this article written by the team at Déjà Partners, we explore 7 reasons why an economic downturn can be the right time to start a business.
#1 Lean is Mean
Starting a company during a period of economic trouble forces founders to build a lean and mean company with strong business practices that can be leveraged when the economy begins to grow again. Startups need to cut down on costs and expenses to stay afloat and survive. While startups might not have the same capital as other companies, they need to be resourceful and take calculated risks. They also have to be more creative and focused with their ideas because they don’t have a lot of money to spend on them, which is why startups are often more innovative than larger companies.
A great way to think about creating a new sustainable business is to use the Lean Startup methodology from Eric Ries. The Lean Startup approach fosters companies that are more capital efficient and that leverage human creativity more effectively. It is a set of principles for entrepreneurial learning and business model design.
Lean Startup relies on “validated learning”, rapid scientific experimentation, as well as several counter-intuitive practices that shorten product development cycles, measure actual progress without resorting to vanity metrics, and help entrepreneurs learn what customers really want. Rather than wasting time creating elaborate business plans, Lean Startup offers entrepreneurs a way to test their vision continuously, to adapt and adjust before it’s too late.
#2 Take Advantage of the Vacuum of Innovation
In a downturn, companies have a strong tendency to hunker down, play it safe and wait for an economic upswing. They are looking to cut costs and avoid making any big investments. This is the reason why innovation is typically at its lowest during a downturn.
This is a dangerous strategy for established companies because when the economy starts to recover, these companies will often be in danger of being left behind by nimble startups who have taken advantage of the time during the downturn to innovate and grow their customer base.
When there is a vacuum of innovation amongst larger companies, this is the perfect time to bring new ideas to market since there is significantly less competition. It’s also the perfect time for startups to build their best product and take advantage of this vacuum while established companies focus on their financial bottom line.
#3 Find your Niche Market
Startup companies, in downturns, are forced to quickly find their niche market to survive as their financial resources are minimal due to either being bootstrapped or having received relatively low funding from investors. Successfully finding their niche allows startups to focus on what they are best at, and with persistence, to grow and ultimately thrive. So, what is the best approach to ensuring a startup’s one shot will hit the target in a downturn?
April Dunford, author of the influential book “Obv!ously Awesome”, describes how positioning is the act of a company deliberately defining how they are the best at something that a defined market cares a lot about. This ‘defined’ market is a company’s niche market where customers not only buy the product, but they also love the product and are prepared to spend more to acquire it.
Dunford describes the positioning flow in 5 steps:
- Competitive Alternatives – if this company did not exist, what would customers use?
- Key Unique Attributes – what features does the product have that alternatives do not?
- Value – what value do the features enable for customers?
- Customers that Care – who cares a lot about that value?
- Market you Win – what context makes the value obvious to a company’s target segments?
By having a good handle on a company’s ideal prospects, their product’s unique attributes and the value that those attributes can deliver, it is possible to identify the niche market that makes a company’s value obvious to those customers who care the most about that value.
#4 Business Model Innovation
While downturns are a challenge for any business, they also offer tremendous opportunities for business model innovation. New and established platforms that help customers save money and create additional revenue streams for their providers are especially well-positioned to benefit from a downturn.
Let’s begin by explaining what a business model is. The team at Déjà Partners will simply say that a business model is how a company makes money! However, let us drill a little further into this and say that a business model is the set of activities that a company engages in to create, deliver and capture value. Business model innovation is therefore about new ways for a company to assemble these activities to create more value for customers and for itself.
When Michael Dubin started Dollar Shave Club in 2011, he was a 33-year-old tech worker who had been laid off from his digital marketing job in 2009 and then turned down by all the business schools he applied to. The genesis of the business started when Michael met Mark Levine at a holiday party and discovered that Mark had difficulty offloading a large stock of razors and blades that he had purchased cheaply from an Asian supplier.
Dollar Shave Club went on to be a disruptive force in the men’s shaving industry, one dominated by Gillette for over a Century. It did so without a single patent to its name but with a new business model innovation of a direct-to-consumer (D2C) subscription service and a unique marketing strategy that was new to the shaving industry. Dollar Shave Club was acquired in 2016 for $1 billion by Unilever who previously had been a small player in the highly competitive (and profitable) men’s razor market much to the detriment of Proctor & Gamble’s Gillette.
#5 Incumbents are Vulnerable
Incumbent firms are businesses already established in a market or industry over many years, are successful and are well known. Such firms, however, can be more vulnerable than new entrants in a downturn because they have higher fixed costs and limited flexibility to adjust their prices and offerings.
As the demand for goods and services decreases in a downturn, many incumbents enter a defensive mode with hiring freezes and warnings about revenue and earnings impacts. All too often, Research & Development budgets are slashed while the business necessarily focuses on day-to-day cashflow.
The strategy for a startup business during a downturn is to attack incumbents with a new, improved product or disruptive business model. This strategy is not without risk as it may not be successful against the incumbent. It is important for the startup when implementing this strategy to identify which incumbents they want to attack and what they are not doing well. For example, if a startup has an App that provides a service that is in high demand and the incumbent has no App providing this service, then the startup should consider attacking the incumbent with their new product.
#6 Talented People are Looking for Work
For companies that can secure startup funding to grow their business rapidly, a major challenge is recruiting highly skilled people with backgrounds in areas such as software engineering, project management and data science.
When times are good, finding the right staff is really, really hard. With a shortage of qualified people in the industry, competing for this talent becomes very expensive and mostly unaffordable for startups.
In a downturn however, when layoffs are rife, highly qualified, talented and effective individuals can be found much more easily than during the good times. With industry layoffs, large numbers of tech workers are released back into the jobs market, which then places downward pressure on the compensation of these workers, making it easier for startups to acquire the new talent that they need at a price they can better afford.
#7 Smart Investors want to Invest
With a huge wave of low-cost capital over the last decade, and an influx of new players into the venture ecosystem, many venture capital firms will admit that their market became dysfunctional with compressed due diligence, extremely risky investments, and an appetite for deals at almost any price.
While this seemed like a golden time to raise capital for startup and scaleup companies, this dysfunction did not and will not serve the best interests of entrepreneurs, many of whom are now facing down rounds at eye-watering valuation discounts.
The impending downturn has brought forward a necessary reset in the venture capital world in which deals will be priced at realistic valuations, startups with financial discipline and innovative products will get funded, and the recent financial entrants and speculators will be wiped out. Every cloud has a silver lining.
Thank you for reading!
How We Help Entrepreneurs
At Déjà Partners, we’re passionate about helping the best entrepreneurs and early stage companies succeed. We can work closely with you on a pro bono basis (at no cost) by providing mentorship, guidance, and support to get your new business started and be ready to rise to the challenge of building that ‘special’ something from scratch. We can then help you prepare for a successful fundraising with institutional investors or debt providers. And over the longer-term, we are here to help navigate the challenges of scaling your business to create value and achieve your goals. Given our long careers in building businesses – “been there, done that” – we can help you mitigate against the prospect of failure so that you can approach your business journey with growing confidence and optimism.
Contact us today to learn more about how we can help.