July 29, 2022 by Adam Hoeksema
Well it looks like a recession is upon us. In fact, it looks like we are already 7 months into the 2022 recession since we found out yesterday that the official GDP has contracted in the first and second quarters of 2022. In the past, two consecutive quarters of negative GDP has been the official definition of a recession, but just this week that definition has been “changed”.
No matter what the definition of a recession is, the fact remains that we are seeing an economic downturn in 2022 and you should be taking action to recession proof your startup. Here are 5 things to do to recession proof your business.
1.Get to “default alive”
Paul Graham wrote one of his famous essays in 2015 about whether your startup is “default alive” or “default dead.” The basic idea is that in order to be default alive you business needs to be on a path to profitability with the money that you already have in the bank. If you need to raise more investment or secure another loan in order to cover losses while you work to reach profitability, then you are “default dead.” In other words, if you can’t raise more capital the business will die.
So with a recession starting, you should try to reach “default alive” immediately. You shouldn’t assume you will be able to raise another round of investment or secure a loan. This means you need to cut costs or increase revenue to reach positive cash flow. In a recession it can be tough to increase revenue as the economy contracts, which is why you see tech companies laying off workers in order to reduce costs.
2. Lengthen your Runway
If you can’t reach “default alive” status, meaning that you will need to raise money again before breaking even, then your next best option is to lengthen your runway. We wrote an extensive article on the subject “What is a Cash Runway? How to Calculate it and Tips to Extend it!” If you can lengthen your runway, you will have a better chance at surviving the downturn and reaching a point where investors and lenders loosen up again. You can check out business lending trends on the St. Louis Federal reserve website and VC funding trends on tools like Crunchbase. This data can also give you some insight to see how long previous downturns in the economy impacted funding from banks. You can see that after the peak in 2001 and 2008 it took years for business lending to fully recover:
Now your task is to do some cash flow forecasting to determine how long you think your runway will last and what you might be able to do to lengthen that runway. We have a library of 60+ templates for cash flow forecasting for just about any industry that can help you with some scenario planning.
3. Secure a business loan during a recession
Another interesting thing you will notice in the business lending graph is that business lending seems to peak once we are already in a recession, so since we are still early in the 2022 recession, you may still be able to secure a business loan to help you bridge the gap to the other side of the recession. Any time you are taking out a business loan and personally guaranteeing a loan you need to proceed with caution. If you really need a business loan to survive the recession, that might actually mean it isn’t a good time to take out a loan. I discussed how to know when to close a business previously, but sometimes taking out a business loan is just delaying the inevitable. It might be a good time to take a loan though if you are in a position of strength. If you don’t really need the loan, but want some extra cash to be able to weather all kinds of storms, it might make sense. Also, if you wait for the recession to get bad enough you can almost be certain that the government will introduce favorable lending programs like PPP, EIDL, RRP, and SBA 7a programs during the COVID pandemic.
4. Work in the business not on the business
In Michael Gerber’s book the E-Myth Revisted, Michael introduced the concept of working on your business not in your business. This is excellent advice in almost all circumstances, business owners need to get out of the day to day and work on growing, systematizing and scaling their business. But in a recession, I think entrepreneurs should actually take a step back and work more in the business, work in the day to day operations. Why? Primarily because you can save a little bit of cash by doing billable work yourself instead of paying another employee. This just makes you a little bit more recession proof. Another, maybe even more important reason, is that in a crisis it is important for employees to see their leaders working alongside them and willing to do the hard work. If you have to cut staff members which makes life more difficult for the remaining employees and you as the owner are still leaving for golf at 3 every afternoon, your team isn’t going to rally in a tough time. Famously, Elon Musk spent months working and even sleeping on the manufacturing floor at Tesla during what he called “manufacturing hell.” Elon Musk, one of the richest men in the world, spent time working in his business during a time of crisis, so you can too!
5. Surviving is Thriving… for now
During a recession, it is ok if your primary goal is survival. Not all firms in your industry will survive and so by simply surviving the recession you will likely be gaining market share in your industry. Of course everyone wants to be the entrepreneur that puts the pedal to the metal during a downturn and eats up tons of market share, but just remember that the act of surviving is enough to put you in a better position coming out of a recession than when you entered. Another common saying is “time in the market” is more powerful than timing the market. Just surviving and living to see another day increases your time in market. Your potential customers and partners will see that and reward that time in the market.
If you are thinking this all sounds great, but you haven’t started your business yet check out 5 reasons to start a business during a recession and Top 5 Small Businesses to Start in a Recession. As challenging as it can be to manage through a recession, we hope these steps will be helpful as you look to survive the 2022 recession.