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While economic stability is seen by many as the most attractive time to run a business, these periods often favor established companies that already have a foothold in their respective market. It’s during times of uncertainty and change that the most resilient companies emerge, as the “black swan” event of COVID-19 served to show us.
Economic turbulence can actually help new ideas to flourish and fledging companies to establish their position in the market. In fact, some of the most iconic household brands of today were established during a downturn.
General Motors launched in 1908 when the economy was still reeling from the ‘Panic of 1907’. Burger King grilled its first Whopper in 1953, another period of recession, while CNN broadcast its first bulletin in 1980 during a time when skyrocketing U.S. inflation hit 15%. And let’s not forget that prominent startups such as Venmo, Uber, and WhatsApp launched during the most recent financial crisis of 2008.
2023 has been marred by skyrocketing inflation, market contraction and highly cautious spending activity from both consumers and investors. As a result, European founders may believe now is the worst time to launch or expand a business, yet history shows us this isn’t necessarily true.
As an experienced investor in startups in both U.S. and European markets, I am very bullish that the current economic environment offers hidden advantages when it comes to fundraising.
Fewer competitors on the playing field.
During times of economic turbulence, investors are often the first to employ a more cautious approach when making new deals. This can be seen playing out today with the global venture capital market where deal value hit a six-year low during Q3 in 2023 according to data from PitchBook and the NVCA.
While these numbers paint a sobering picture, it doesn’t mean that obtaining financing is out of the question. Yet for many aspiring entrepreneurs, the challenging nature of the current VC market will be enough to act as a deterrent. Although economic downturns usually mean more people consider starting their own business, the current funding winter will deter many of these from actually taking the plunge.
This is good news for entrepreneurs who remain committed to the strength of their business idea despite the challenging funding climate. Those bold enough to seek funding in 2024 are likely to find that decreased competition will stand in their favor, increasing the opportunity to land a deal with investors.
However, success will hinge on presenting a growing business with real promise. Entrepreneurs will need to lean into the same confidence that fueled the decision to seek financing during the downturn to clearly communicate the strength of the company and the potential of its target market to help attract those funds successfully.
A ‘trial by fire’ for founders.
For better or worse, times of economic uncertainty tend to act as a powerful litmus test when it comes to the strength and resilience of founders. To illustrate, the COVID-19 pandemic sparked a boom in startups that catered to the ‘new normal’ of remote work. While these solutions were extremely valuable at the time, demand quickly waned once lockdown measures began to ease.
Private market values for tech startups have since declined by 30%-85% while the overall failure rate for startups peaked in Q3 2023. This doesn’t mean that all affected startups didn’t have market potential, but external factors quickly sorted the wheat from the chaff once the bubble burst.
Building a business in your comfort zone is surely appealing but trends of the past few years have made it clear to investors and founders that being able to deal with unexpected challenges is a key success factor.
Companies led by entrepreneurs who have faced and overcome financial challenges tend to be more resilient and make better decisions as they grow. Therefore, instead of fearing recessions, it is important to see them as an opportunity to demonstrate commitment, creativity, and motivation to succeed in the eyes of investors and business partners.
Lower deals equal better long-term odds.
Although it may sound counterintuitive to entrepreneurs who have been striving to raise the largest amount of financing possible, smaller deals can actually be good news for your business.
This is because the way startups are financed and valued follows a fairly rigid pattern in which each subsequent round should be larger than the last. When the opposite happens it’s called a “down round” and is generally seen as a very bad sign that can kill the fortunes of any fledgling company.
Current investors have serious doubts about continuing in the next round of financing and future investors will wonder why the company has not been able to achieve the objectives set in the previous round.
Although experiencing a “down round” isn’t always a reflection on the company’s potential. the psychological impact it creates can be irreversible. This means accessing too much capital funding early on creates a serious risk.
While the current record-low in terms of venture deal value may seem like bad news, it can actually work in the favor of founders who seek financing during this current blip. While the initial financing round may be lower than hoped for it means expectations will also be easier to meet.
Founders can take a smaller deal now and work on refining the business model and product-market fit to prepare to move to new heights when markets rebound in the near future.
The silver lining found in economic downturns.
While the hype and promise experienced during a boom year are intoxicating for aspiring founders and investors alike, it’s not always the smartest time to start a business. Boom years mean increased competition, inflated valuations, and an unsustainable growth trajectory.
Starting a business during an economic downturn isn’t for the faint of heart, but some of the most enduring companies have been born during a crisis.
With less market activity and reduced competition, these resilient founders with faith in the value of their ideas very often emerge triumphant.
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