At the onset of a potential recession, startups might turn into endangered species. Of course, they won’t go extinct, but many might suffer as economic instability makes potential investors shy away from riskier investments.
Today we’re talking to Harold Soper from Hyacinth Capital Advisors about his view on the situation and ultimately trying to answer the question: Can you make your startup recession-proof?
- As a capital advisor, before starting your own company, you have much experience helping startups get funding. What’s your overall view on the current investment climate? How are things looking for startups?
Harold: There’s no question that the current climate is more challenging for startups to raise capital than it has been in probably the past decade. Even now, deals are getting done, funds are active, and businesses are raising capital. However, a recession has never stopped entrepreneurs from starting businesses and bringing innovative, scalable ideas to the market. Economic changes, especially challenging ones, help investors better understand a business’s viability and value proposition. In fact, these are the times that best separate and reveal disruptive value propositions from more fragile proposals.
- Many startups are thinking about ways of weathering the storm. Should startups focus on cost-cutting, ramp-up monetization, pivot, or put in even more effort to secure funding?
Harold: The short answer is all of the above.
A recession can break a business, but it can also give founders a chance to look inward, streamline operations, focus on customer needs, and innovate to emerge stronger, leaner, and smarter on the other side.
For startups in the earliest stages, irrespective of the economic scenario, it’s best to bootstrap and seek investments from friends and family. First, prove your idea has potential and try to understand your market as much as possible. Then, when you’re ready to grow, you can start looking for outside investments. Outside investors will be interested in the value you offer to the consumers and whether the product or service can grow under the management of your team. During buoyant economic periods, it is easier to take risks for granted. In a recession, it is easier to scrutinize your operating model. Investors will always be heavily focused on management acting as a responsible steward of their money and resources, which becomes more apparent in tougher economic environments.
On the other hand, responsible spending is fundamental early on and during a recession. Because expense management can be detrimental to growth, you can seek capital to invest in your strategy even during a recession. A strong strategy supported by realistic and attractive budget assumptions can raise capital.
- Is there a way to ensure the financial stability of the startup in the current climate?
Harold: Anything can happen during a recession. It’s good to have a plan B that you can implement if things go sideways and communicate this to your financial partners.
From the investor perspective, the most attractive businesses to invest in are those that can stand on their own two feet or show a well-grounded path to self-sustainability.
This is always true, but especially during an economic downturn.
- In your opinion, what activities and subsequent costs should startups cut down on (to extend their burn rate)?
Harold: Founders must focus on running as lean as possible at all stages and eventually seeking investors to scale. For some, this may mean focusing on running the leanest team capable of delivering on plans, outsourcing development, or offering incentives to hire and retain key employees or advisors.
Early-stage startups need to understand how to ramp up operations to the next “weight class” so that the growth does not break their back. If you are cost-cutting, your operations are not properly supporting your growth. If you are not growing, the business has a fundamental problem.
The primary goal of a start-up should be to achieve the self-sustainability of a business from the operating cash flows. Achieving this will also make the startup more attractive to investors too.
- Are the chances of getting funded lower in a time like this? Is there such a thing as a ‘right’ and ‘wrong’ time for looking for funding?
Harold: For good ideas, no. As I mentioned before, the only aspect that changes during the recession in the funding game is that it is easier to scrutinize the strength of your operating model and your value proposition. Investors usually decide to take a meeting or pursue a deal within the first few minutes or pages of a pitch deck. Of course, it has to be a great “idea/proposal.” Still, when we work with startups at the seed or Series A stage, our evaluation usually focuses on whether founders/management have a detailed, well-rounded understanding of their business, a clear growth plan, and, if early enough, a launch plan for their product and generating revenue.
The best time to raise capital is not when a business is desperate but when it can prove a need to support growth/demand and strategically use outside capital and resources to take the business to the next level.
- What can startups do to improve their chances of getting funding?
Harold: That depends on the stage of development of your business. But in general, you should always focus on your operations, evidence supporting your need to support growth financially, and demonstrate your ability to operate and execute within your business environment. For example, can the light turn on at the product stage, is it disruptive, and will there be demand? Then, during commercialization/scalability – focus on your plans to monetize that growth efficiently, distribution channels, and go-to-market strategies. Improving funding chances requires presenting an idea with solid plans and well-researched, realistic growth opportunities.
- The uncertainty startup founders are currently facing is enormous. How can they overcome the fear of failure, and what could happen if the startup fails?
Harold: Every startup is at risk of failing, even the so-called unicorns. Fear is driven by uncertainty or the lack of feeling in control of an outcome and can impede your ability to make decisions and take risks. Instead, focus on understanding your business environment and navigating through it.
The more you try to understand and learn about what you are facing, the better prepared you are to act without fear, and the more likely you will make it across to the other end.
- So, can you make your startup recession-proof? And if not, what can you do to better your chances that it doesn’t fail before even taking off?
Harold: There’s no way to truly “recession-proof” a business, but there are plenty of ways to pivot or extend the runway if the economy slows down. To improve the chances of success, even in a recession, I always advise founders and management teams to leverage their experience and, if needed, bring in talent to fill in any gaps. A team with the knowledge and expertise to turn an idea into a successful venture will have the best chance of success in a recession because it’s agile, makes decisions quickly, and makes itself invaluable to customers. Customers and investors alike value good ideas. If a startup truly understands its market and can solve a customer problem, the rest of the equation is time, responsible governance, and capital.
Harold Soper is the co-founder of Hyacinth Capital Advisors. He has a long history of working with clients at all stages and geographies: from early-stage startups to established, mature businesses seeking strategic financing, M&A, and exit strategies. His goal has always been to help his partners achieve long-term success through trust and tailored comprehensive advisory services.