While economic downturns are a time of hardship, they could also be a time of opportunity. Here are … [+]
With tech layoffs making the news, it’s fairly likely that 2023 wouldn’t be a year in which it is easy to find a comfy tech job. While this would undoubtedly be a time of hardship, it would also be a time of opportunity. Here are the major threats and opportunities for new startups during a market downturn:
1. Capital:
Availability of capital is usually a problem during market downturns. Most startup funds become more conservative and generally speaking invest less in new projects. Even worse for early-stage startups – the risk tolerance of investors might also fall, which means that the available capital for new projects will naturally concentrate on a few “safe” bets.
That said, during economic downturns the usual government policy is to increase spending in order to battle the recession. This means that business loans along with other forms of fiscal stimulus (subsidies, etc.) could become more easily accessible.
2. Costs:
While capital might be a bit more difficult to find, you might need less of it in order to survive. During a recession, the cost of hiring employees, renting office space, and other operational expenses may be lower due to increased availability and reduced demand. This can allow a startup to stretch its funding further and become profitable more quickly.
3. Talent:
By far the biggest reason why a recession is a good time to start a new project is that great tech talent becomes available.
In periods of economic boom, it’s very hard to compete with established tech giants for top talent because of the level of pay and other benefits established corporations can offer. However, due to the layoffs, attracting and keeping high-quality people suddenly becomes easier.
However, in a time of cost-cutting and layoffs in the giants, experienced people suddenly become available on the market. This doesn’t just mean you can find and hire people more easily – you can possibly find co-founders of a very high caliber.
It’s not unheard of in layoff periods for ex-colleagues to become partners and start their own projects related to the industry they were previously working in. A recession is a great period to apply the lessons you learned while working for your previous employer during the economic boom periods, in which big businesses tend to grow more inefficient.
This leads us to our last point:
4. Markets:
The favorable market conditions and availability of capital during periods of economic boom make inefficiency less fatal for large corporations. A recession, however, puts a quick end to this. Consumers become much more cost-conscious and quickly cut their spending for what they consider non-essential products and services. Combined with the fact that capital becomes harder to access, this quickly drives inefficient and rigid businesses into bankruptcy.
This is both a threat and an opportunity for young startups. The agility of such projects gives them the opportunity to adopt innovative practices and business models – in other words, to apply the lessons we mentioned. Moreover, the failure of old businesses opens up space in the market for new companies that are able to provide better products and services.
Nonetheless, the cost-consciousness and conservativeness of consumers make it harder for unestablished brands to attract new customers, which means that in order to be successful, being the new shiny thing isn’t enough. You need to provide something of real value that people are actively searching for.
In conclusion, there are pros and cons of starting businesses during an economic downturn. All things considered, however, the higher likelihood to attract high-quality tech talent to your project makes it a great idea to try something new.