How Expanding Your Business Model Could Protect Your Startup During an Economic Downturn

In my experience leading fast-growing businesses through extreme market fluctuations in both the United States and Israel, I’ve found one entrepreneurial rule to be true—volatile markets require a steady yet adaptive approach. Keeping calm and making responsive decisions (instead of reactive decisions) can help you keep your business on the right track during an environment of uncertainty and fiscal austerity, and as a practice, can begin by taking an assessment of your most immediate risks and carefully repositioning your business model.

This is particularly true for startups. A startup’s increased risk during a recession, like the one we’re in now, is mainly due to the cost of capital increases. A harsher fundraising environment means you’re stuck raising money on worse terms. Practically speaking, you’ll have to raise down rounds at valuations smaller than what previous raises commanded.

During downturns, high-risk, high-reward venture capital funds become less attractive to investors. When VCs have difficulty securing capital, there’s less money for them to invest in startups. And when they do invest, they’re likely to be more conservative. Unfortunately, that effect trickles down to startups and makes it more expensive to raise capital—VCs demand more equity, startups raise less money per round and valuations become lighter.

As a result, valuations will inevitably decrease, and the lack of time and difficulty of fundraising will mean serious trouble for startups—some might even fail in the absence of available capital. Considering 89% of private equity fund managers expected a prolonged downturn even before COVID-19 hit (according to a 2019 survey of 76 senior executives at private equity firms in the U.S. and internationally by financial advisory firm BDO), this concern is very real.

If you do succeed at raising capital, it pays to figure out how to generate enough revenue to cover your costs. You may be able to mitigate financial risks by taking funding when it’s available and keeping it in reserve until the economy recovers.

Ultimately—whether you’ve been able to raise capital or not—it may help your business to reassess your risks and adjust your business model accordingly.

Knowing Your Risks

Companies flatline when money runs out and all their liabilities—like the bills due right now—exceed total liquid assets. If you haven’t already, consider implementing a risk management strategy that helps you mitigate any uncertainties surrounding cash flow.

To begin, you may be able to minimize market risks by letting go of perfection. Once your product is good enough to make at least some customers happy, get it in the market so it can start generating cash flow and feedback. A SWOT (or strengths, weaknesses, opportunities and threats) analysis can keep you ahead of competitive risks because you can develop appropriate defenses against your competition.

As a leader, one of your most crucial responsibilities is to establish a clear vision and culture that your entire team can rally behind. That also means having a trustworthy team. If you’re a rookie entrepreneur, you may be able to counter operational risks by ensuring you have experienced managers on your team who can steer around obvious land mines. In addition, consider retaining the right attorneys to anticipate legal and regulatory risks and to combat legal issues that could arise.

Insulating Your Business Model

By expanding your business model now, you may be able to help protect yourself in this economic downturn and beyond. For executives at high-performing companies, taking action early can be the difference between not just surviving this downturn, but thriving in spite of it. When done right, your company could potentially exit this period with improved operations, a stronger competitive position and a better balance sheet.

1. Address risky customer verticals. Does your core business fall into a discretionary (or nonessential) spending vertical? If so, consider a pivot. Try to seek out industries that people can’t live without, even in hard times (think repair or maintenance services, public works or industries that offer staples). Americans aren’t starting businesses at the rate they used to, which leaves more opportunity for you to expand.

2. Automate tedious processes. Although you always want to keep your talented employees around, retention is critically important right now. You may be able to improve employees’ job satisfaction — and your retention rates — by automating as many of their tasks as possible. This can free up their time from tedious manual processes so they can do more strategic and thoughtful work (which also happens to be more rewarding).

Consider starting with back-office transactional processes that, while necessary, take up a significant amount of time. In most cases, automation software is a better bet and bargain for your team than sticking with antiquated manual processes.

3. Make data-driven decisions. To come out on top, it’s critical you try to understand and measure data. Consider taking the time to actually invest in data so you can keep a tighter hold on your financials over the next few months.

For executives at high-performing companies, taking action early can be the difference between not just surviving this downturn, but thriving in spite of it.

4. Invest in versatile people. It’s hard to know exactly which areas of your business will need additional support right now. If you’re in a spot to hire, consider hiring for adaptability: This may ensure that your team is able to pivot as needed. If you’re not in the position to hire, try to look for resourceful problem solvers in-house who find satisfaction from mapping out novel solutions. You’ll also want to conduct training across departments, which could lead to insights into ways teams can further collaborate on and automate processes.

For companies to succeed during uncertain times, planning appropriately and taking decisive action could make all the difference. With the right processes in place, a company may be able to exit this period relatively unscathed.

Photo: Getty Images

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