When it comes to recessions, companies tend to panic. And with good reason. There’s history that shows us that recessions can be a time to slow down. But new emerging data has a different point of view. Although recessions can be a time of cutbacks, it can also be a time of explosive growth with the right strategic moves — especially for growth-stage startups — the top of which is digital initiatives.
We’re exploring which of these can help your company come out on top in times of economic downturn.
Understanding the Stages of a Startup
A startup company is essentially launched to evolve an idea with the hope and potential for eventual significant business opportunities and impact.
When most people think about startups, they think of two friends that spent endless nights after their day jobs coming up with the next idea of the future. But it can also be the entrepreneur walking who has a flash of insight that they think will change the world.
At the end of the day, startups, like any other business, all start with one thing — a good idea and a solution to a problem. Unlike traditional businesses, startups typically lack traditional financial backing and business structures.
However, there are multiple stages to a startup, which is why identifying which stage your business is currently in is critical to the necessary steps toward success.
A startup isn’t just a business; it’s an evolution. From the start of the idea to the end result and beyond, this business is (or should be) constantly growing and evolving.
When a startup is in the early stage, it typically means the company has an idea they feel will solve a problem for a specific customer base. And if they want to get investors, they’ll also need to have reasons as to why that solution will generate money. This is how early-stage companies will attract funding.
You may also hear terms like pre-seed and post-seed, which refer to points within the long process of getting that funding. During the early stage of a startup, you and your team (if you have one, this can often be one or two people) are coming up with ideas on how to organize your business, and build the foundation to launch your product or service.
This is the development stage.
What Are Funding Rounds for Startups?
When a startup is trying to secure funding, there are different types of funding available. From fundraising and loans to credit cards and even family members — many businesses are willing to do whatever it takes to get up and running.
However, two of the most popular sources of funding are:
Series funding is when a startup raises different funding rounds, with each round increasing in monetary value, which in turn increases the value of the business.
There are five series:
Series A — Series A funding occurs once a startup has made it through the seed stage and they have gained some popularity and traction. Investors are typically willing to put faith in the businesses at this point, based on the idea. This type of funding usually comes from venture capital firms but can also come from angel investors. It is also known to be one of the most difficult types of funding and can be a point where many businesses fail.
Series B — A startup that reaches series B funding has typically already found its product and market but needs help expanding its business. This funding also commonly comes from venture capitalists.
Series C — A company that reaches Series C funding is typically performing very well and is ready to develop new products and expand to different markets. For most companies, Series C is the last round of funding.
Series D — Series D funding isn’t as common but may be used when a company has a specific expansion opportunity or needs to increase the value of its company before going public.
Series E — The last and least common, Series E funding is usually the last resort for companies that aren’t meeting their expectations, want to stay private longer, or need more help before going public.
Another common way of securing funding is through an angel investor. Seemingly sent to save the day, angel investors are typically high net worth individuals who are looking to put small amounts of money into startups for a return.
Angel investors can be a great option for startups, and they typically come with less red tape than traditional investors and are able to make decisions on their own.
At the opposite end of the spectrum is the late-stage startup.
At this point, a later-stage startup typically has dependable financing sources and is executing its business plan. Their investors are diligently watching their performance as they continue to grow and improve.
Businesses are typically ready to move into this stage when they’ve:
Achieved significant growth
Hired additional team members
Received multiple rounds of Series A funding
Shifted their goals to becoming a company with sustainable growth
Businesses are likely in this stage if they are:
Experiencing significant growth and gaining new business
Looking to expand to new markets
Potentially considering an exit
In between the conception of a business and the point where it flourishes is one of the most crucial stages for the company — the growth stage.
A growth-stage startup — sometimes referred to as a venture-funded startup — typically begins when you have received your first Series A round.
This time period is the most important in a business as it is usually the time that will make or break the success of a business.
During this time, your investors will likely switch from having faith in your idea to having concrete expectations, focusing on your business model and growth strategy, as well as tracking results.
How to identify if your startup is in a growth stage?
You can typically identify being in a growth stage when you have:
A working product
Consistently proven product return on investment
Evidence that sales cycles are fast and sales are efficient
Secured Series A funding
How Growth-Stage Startups Can Leverage the Recession
Being in a growth stage can feel like an extremely fragile place to be for a business, particularly during a recession. And although recessions can be a time of dramatic loss for companies, new research shows that it’s also the time when companies can experience some of the most dramatic gains — especially for a growth-stage startup.
However, this depends on the action of the company and how they react to the coming news of a recession or the recession itself.
This time, unlike previous recessions, businesses will be navigating a series of situations that have not been experienced before, including:
Supply chain constraints
World market strains
As well as existing uncertainties from the pandemic, impacting feelings of personal security
And although this is a lot to manage, there are key strategies that can help businesses come out more successful than before.
Practice and Plan
There’s no time like the present, and that even goes for preparing for a recession. Although it’s something no company wants to endure, the reality is that it can happen at almost any time, which is why it is imperative for companies to have a plan.
Scenario planning pre-recession allows companies to envision different possibilities for a recession and think through actions for each, without fear or panic.
Additionally, it can be helpful to create specific benchmarks with corresponding actions that indicate when to take action and by how much. This helps remove any emotion in decision-making and can lead to better outcomes if and when a recession does hit.
Although efficiency should always be a business goal, it becomes especially important during times of economic downturn. And one of the ways to best ensure efficiency is through automation.
Prioritizing automation, especially before a recession, can help in reducing overall company costs and frees up valuable human resources and workers.
Some of the most successful automation plans include:
Clear goals and identification of what is being replaced
A well-defined transition plan
A measurable way to track savings
These savings can then be invested during the recession, while other companies are being reactionary and making significant cuts to stay afloat.
In order to increase the chances of success during a recession, part of planning should be discussing and creating detailed plans for the money, including revenue, funding, and investments.
This also includes solidifying pricing and any pricing changes. When inflation hits, most companies increased prices in order to continue to make the same profit, as product material prices also increase.
It’s important to create models and limits on price increases as they relate to customer purchases, as well as to decide when and how prices can be dropped to increase the number of purchases while still maintaining profits.
Focus on Your Customers
Economic downturns, although a tricky time for businesses, can also be a time of make or break customer loyalty. If a company wants to set its digital customer experience a part of the rest, they have to measure how a customer feels about not only their product but about the entire experience with its brand as well.
From the first interaction, such as an ad, to the shipping process and, of course, the product itself — the experience should be fluid and seamless.
One thing many companies assume is that customers will bring any issues to their attention. And although that can be true for some people, many customers will either stop the process of purchasing a product or will keep the product and no longer purchase that brand.
One way to stay on top of this is by gathering customer feedback, particularly through customer surveys. Customer surveys, including exit surveys, can provide specific insight into why a customer did or didn’t purchase your product or what they did or didn’t enjoy about the interaction with your brand. This type of survey allows you to ask very specific questions to solve specific problems.
If you’re noticing that customers have a consistent complaint, that’s something you should take action about. Customer reviews are powerful tools, and customers are much more likely to leave a positive one if they’ve not only felt heard but also know the company took action to solve their problem.
Pursue Mergers and Acquisitions
Despite the fact that there are many uncertainties in the current economy, there are still many opportunities for companies to come out on top through strategic mergers and acquisitions.
According to Bain research, “Despite uncertainties in everything from deal valuations and credit markets to the shape, magnitude, and timing of a recovery, we see solid possibilities for companies willing to act. The fundamentals for M&A still exist. We still live in a world where capital is generally available for deals. Many businesses still have strong cash flows and balance sheets; they just need to continue to manage them well.”
Companies that are looking to expand and grow can do so through mergers and acquisitions, especially during a time when many companies are thinking about selling, and potentially even at a lower cost than the company is worth, due to the impending pressures of the recession.
This is a time to think strategically about growth.
Catapult Ahead With Digital Marketing
As more and more people are at home and online, one of the most important components of getting ahead during the recession is getting digital with consistent marketing and advertising.
This should be done before the fact as a proactive way to get your company’s name out there. The customer experience — specifically the digital customer experience — is vital to businesses that want to stay on top.
Some of the key ways to stand out with digital marketing are through:
Create brand consistencies to ensure the customer will experience the same great product and service over and over again.
Visual consistency also allows your consumers to recognize you immediately and ensures they can pick your products out of a crowd.
Understanding the digital market
Create a digital marketplace that simplifies the buyer’s journey in some way, either by saving them time or even providing monetary incentives for shopping online if it benefits the business in some way.
Providing an intuitive user experience
Make sure your business and interface choices make sense to the consumer and ultimately make their overall experience better.
Using market research
Market research allows businesses to see what traditional sales data doesn’t show, including why your product is or isn’t selling successfully, how to modify your brand to increase sales, and how your brand and products differ from others like it.
Understanding the product life cycle
A more nuanced part of the customer experience is the product life cycle. The product life cycle refers to the length of time from when a product is introduced to the market to when it’s removed from the shelves.
Although this may not seem as if it directly affects the customer, when products don’t sell or prices change too quickly, customers can begin to distrust the brand. There is a certain amount of patience and strategic timing that is required to be successful. And the more a company understands that timing, and its product lifecycle, the more successful it can become.
What Actions to Avoid During a Recession
Although it’s incredibly important to know what to do in order to plan for a recession, it’s equally as important to know what not to do.
Looking back at past recessions, we can —to a certain degree — predict what will and won’t work for future ones.
Here are some things to avoid:
Avoid assuming that aggressive cutting is enough —This only step approach often leads to missing key places for stability and growth.
Avoid cutting the wrong things — Many times, when companies make initial cuts due to economic hardships, they tend to choose things that they may not deem as essential to daily function (such as marketing and advertising) without realizing how much business those initiatives were actually creating. This can actually lead to more loss down the line.
Avoid making decisions under stress — This is where practice and planning come in. If a recession does occur, refer to your guidebook that you created previously, if possible, to avoid making decisions that won’t actually benefit the company.
Avoid waiting to act — Although this may sound obvious to some, sometimes companies just simply wait too long to act, and too long isn’t as long as you might think.
Although recessions are a time to be cautious and strategic, don’t set yourself up for loss. Instead, use this time to act differently and set yourself apart —so you can see incredible growth.
Learn more at SWARM
At SWARM, we offer a full range of product design and user experience services. We have ten years of experience working with startups and Fortune 500 companies. Our team of talented designers is ready to help you bring your growth-stage startup through a recession.
So why wait? Contact us today to learn more.