In the first half of 2022, major tech companies experienced mass layoffs, hiring freezes, and down rounds indicating that we are entering an economic downturn. Unfortunately, history has proven that the majority of early-stage startups don’t make it through recessions due to their reliance on investment capital, high burn rates, and the lack of consistent cash flow.

The “Growth” Mindset

For years many venture capitalists have encouraged their founders to have a “growth-at-all-costs-mindset” meaning that founders should raise as much capital as possible and worry about being profitable later. 

“A growth-at-all-costs mindset is a recipe for out of control burn and topsy-turvy unit economics.” – Karen Rhorer  via First Round

The problem with a “growth-at-all-costs mindset” is that it’s unsustainable especially during a recession where founders have to cut costs, lay off employees, and try to raise more capital when investors are closing their checkbooks. Without a solid business model these “growth-at-all-cost” startups are usually the startups that crash and burn first because they run out of cash.

Fast, the easy checkout startup, shuts down after burning through investors’ money via NPR

Cash Is King

Startups who have a “customer-first-mindset” and are profitable are most likely to thrive through economic downturns because…

  1. Consistent cash flow with healthy margins allows you to scale up and back without jeopardizing the lifeline of your company.
  2. Cash in the bank means you can operate your startup without sacrificing your company’s valuation in a down round.
  3. You have the opportunity to hire great talent from larger tech companies who are doing mass layoffs.

Prepping For A Recession

Here are 3 things to consider when planning your startup for a recession.

  1. Get familiar with a cash flow statement. It takes into account every single dollar, down to the penny, on how cash is moving in and out of your business.
  2. Calculate Runway. Cash reserves divided by your monthly burn rate (monthly expenses) will give you the number of months you have left until your business runs out of money.
  3. Operate as lean as possible. Do more with less, automate processes, and maximize productivity. Be a Minimalist Entrepreneur.

Helping Founders Become Recession Proof

In closing, the name of the game is survival and having a sustainable business model will help you thrive through an economic downturn. Profitable startups are commonly associated with slower growth but as the old saying goes “slow and steady wins the race.”

If you’re interested in building a recession proof startup apply to Square One Startup School’s next cohort to accelerate your path to profitability HERE.