Why Early-stage Startups Can Thrive During Economic Downturns

June 24, 2022 · 5 min read

Have you ever thought about the wildflowers of the startup world?

I have always thought that early-stage startups are often some of the most surprising, rare wildflowers of the industry. Come hail, shine, bulls or bears - they sometimes happen to withstand it all! And bloom! 

They can acclimatize, are resourceful and very tenacious! Their tenacity makes them the most likely to survive economic downturns!

The Relentless Passion To Make It Big…..

Early-stage startups are agile, adaptable, and relatively immune to the ups and downs of the public markets, thanks to their long time horizons. In fact, some early-stage companies might actually benefit from a recession— whaaat? Yes! Read on to know how ;) 

But this is why these types of investments still have high growth potential even when the market is slow.

Here are 5 reasons early-stage companies are likely to survive economic downturns -

1. What do I mean when I say early-stage ventures are agile?

Privately-held startups, especially in the earliest stages, are much more nimble than deeply entrenched mega-corporations with thousands of employees. That’s because building a business from the ground up is often a matter of trial and error. That first prototype of a product might not work at all; early market assumptions might be proven wrong in in-person research; and a company’s third, fourth, and fifth hire might all be working in a new industry for the very first time.

Simply put, a company with ten or twenty people on staff is much more likely to be able to pivot its business operations than one that has to hold shareholder meetings in order to make a minor change. It may also be easier for a small company to cut costs (for example, by downsizing office space or working from home). 

2. Goods and services become comparatively cheaper during a market slowdown

You have to spend money to make money—especially when you’re first starting a business. Early-stage startups have to spend plenty of capital in order to grow (which is a big part of why they raise multiple funding rounds).

Not only does a business need more staff as it scales… it also needs to pay for things like larger office spaces, more benefits packages for its employees, more computers and other equipment, and so on. Cost to scale varies between different types of businesses; for example, a software company may only need to scale up its workforce in order to sell more licenses, while a consumer products company will need to manufacture more units, use more raw materials, and ship more packages to end destinations. Regardless, growth means higher overhead costs—and during a recession, many goods and services naturally get cheaper. For a young startup, that can be a huge benefit.

3. The Opportunity To Hire Great Talent

Rising unemployment is a hallmark of a bad economic downturn, and while this is a tremendous setback for most working-class Indians, it may free up high-quality job candidates that startups can scoop up.

Remember that early-stage firms have extremely lean teams, which means that every new recruit must provide as much value to the company as possible. As larger corporations lay off experienced people to minimise expenses, startups may be able to acquire the same expertise more easily.

4. Tough Markets Weed Out Competitors

A market pullback can yield obvious, tangible benefits for startups—but they still need to have what it takes to survive and succeed. In a bull market, like the one we just left, VC money is much easier to come by—which means that startups with shoddy business plans and high cash burn can keep chugging along for months or even years beyond their logical “expiration dates.”

In an economic downturn, it’s tougher to raise capital; not only do average check sizes decrease, but the time between rounds gets longer. In other words, most companies have to survive longer, with less money. Some businesses simply won’t have what it takes to go the distance—but as those lower-quality competitors drop out of the race, they free up new pockets of market share for the survivors to claim. It’s kind of like hitting the “fast forward” button on the competitive race.

5. A recession can possibly be good for seed-stage companies…

Obviously, not all small businesses have what it takes to survive a severe economic crisis. But for companies with a solid business model, a recession can actually come with a couple of sizable perks, the ones we mentioned above.

Most goods and services get cheaper out of necessity—which means some of a startup’s basic needs can get less expensive. At the same time, layoffs at bigger companies (or struggling companies) can provide survivors with a fresh pool of high-quality talent, many of whom are eager to find work again. Finally, recessions can help “weed out” a startup’s less fit competitors—opening up new pockets of market share for the survivor to claim. These factors combined can create the ideal conditions for innovation. Consider this:

Many of the world’s largest companies today were founded during the Great Recession, including Airbnb, Uber, Slack, Groupon, WhatsApp, Venmo, Instagram, and many others.

In a Nutshell

Recessions, market pullbacks, and economic downturns have historically been some of the best times to found (and invest in) startups. With their long timelines, low costs, adaptability, and growth potential, these opportunities can demonstrate exceptional resilience against financial chaos.

So while the stock market continues to swing wildly between extreme highs and lows… the private markets can provide investors with potentially high-growth opportunities that are, by their very nature, slow and steady.