Earlier this year, venture capitalist (VC) firm YCombinator sent a letter to their founders warning of an upcoming recession. In it, they advised to “plan for the worst" and “remember that your chances of success are extremely low even if your company is doing well.”
Accelerate Your New Business
Get access to the software, services, and support to turn your dream business into reality.
While an impending recession is certainly intimidating, we’ve laid out some factors you can consider to stay ahead of the curve as a new entrepreneur.
Your Checklist to Success During a Recession
While there’s never a surefire way to avoid the impacts of a recession, there are a few essential aspects to consider now that you’re a founder.
Do you need to be a full-time founder?
One of the first questions to ask yourself is if you need to pursue your business full-time. Are there ways in which you can support your business and gain capital through a full-time job, keeping your company as a side-hustle until the economy is better for raising capital? Former founder and current VC investor Darrel Frater at Visible Hands recommends that founders err on the side of caution. ”Don't take on so much risk to the point where you risk your livelihood and don't have capital to pay your bills. I went that route and went into debt,” he said. “It paid off, but not every founder will go through that journey. I recommend that founders take less risk and build on the side. And hopefully that job is adjacent to your business in some way so that you can build your network, your brand."
How can you be smart about cost cutting?
The costs associated with your business are worth digging into as well. Are there areas where you can consolidate costs? Maybe a full-time employee can be made part-time, or you can employ a freelancer to work hourly to get certain tasks completed. Perhaps you can consolidate routine tasks like responding to emails or scheduling with the help of a virtual assistant.
With cutting and consolidating costs, it can seem like the goal is to reduce overall spending. In reality, though, the goal is to increase overall efficiency. Doing an audit of your finances in this way can help you understand the areas where you can streamline your business, ideally cutting costs in the process. One way to do this is to partner with a PEO like Justworks. A PEO offers a number of services designed to help streamline your business, from compliance support and payroll, to HR tools and access to benefits.
And even if you prefer to get benefits through a broker, an all-in-one solution like Justworks can still be a great fit for small businesses looking for services and support that go beyond access to health coverage.
When should you think about raising venture capital?
Ask yourself if this is the time to seek VC funding. After all, it can be more difficult to secure capital during a downturn in the market. According to Frater, there are two simple but big hurdles for founders when it comes to seeking capital from VC investors. One is around reaching out to investors that are aligned with what their company’s doing in regards to the stage of their business (seed or pre-seed), geography, industry, and even demographics. “For an investor to make an investment, there needs to be a strong alignment,” he said.
The second hurdle Frater identified relates to the timing of outreach. “I see a lot of founders that are reaching out and trying to get time with investors before they are investor-ready,” he said. “That’s harmful to their ability to fundraise because first impressions are really important, and this often jeopardizes their ability to fundraise in the future.”
How can you find and pitch the right VC investors?
If you do choose to go after VC funding — fully knowing what that entails in terms of time, energy, and costs — how do you target the right VCs? While pre-seed investors like Frater have said that an impending downturn hasn’t impacted how they do business or make investments, this may not be true for investors whose target audience is a seed-stage or later-stage company. With pre-seed companies, investors are typically making investment decisions based on the team, the customer pain point identified, and the business solution. At all later stages, however, investors are often making their decisions based on revenue and other financial figures, in addition to the previously mentioned areas. As a result, they’re a lot more cautious about investing. Depending on which stage your company is at, targeting VC funding right now could prove to be more challenging than anticipated — or perhaps the same.
Starting to think about the answers to these questions can help set you on the right path, even with a possible recession around the corner. As a founder, there’s pressure to do everything in your power to keep your business alive. That’s why we’re focused on highlighting advice from founders and VC investors in the coming weeks — keep an eye on our Resource Center for more content to help you think deeper about these topics and feel more secure in your position, regardless of which direction the economy heads in.
If you’re eager for more resources on how to navigate running your business, check out our Resource Center or reach out to learn all of the ways we can help support you and your business.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, legal or tax advice. If you have any legal or tax questions regarding this content or related issues, then you should consult with your professional legal or tax advisor.