- WealthUnion Insights
- Posts
- Startup Investing During A Recession - Is It A Good Time?
Startup Investing During A Recession - Is It A Good Time?
Startup investing during a recession may be the best time to strike because returns can be greater and you'll likely get more equity for your capital.
Startup investing during a recession may be the best time to strike because returns can be greater and you'll likely get more equity for your capital.
Earlier this year as the world's top business people and economists converged at Davos, there was a prediction that the global economy could be headed toward another downturn.
Earlier this month, stock markets plunged to their lowest levels since last summer and economists expect them to continue falling for months or years. Are we looking at facing a recession, or, are we likely already in one? Never fear, recessions can bring opportunities for both startup investors and founders.
Recession or not, is it time to invest?
Over the last several decades, whenever the rate of annualized consumer price index (CPI) growth exceeds 4 percent and unemployment falls below 5 percent, the U.S. economic cycle has been heading towards a recession within two months. And recently, the rate of CPI growth was above 6 percent for the first time since April 2009.
The public markets are currently experiencing turbulence; however, the private markets are doing quite well. Digital health startups alone took in $6 billion in the first quarter of 2022, and that's a huge amount compared to just a few years ago. And, an estimated $12.9 Billion was raised by impact startups globally in Q1 2022 according to DealRoom.
Because they're not subject to the ups and downs of the financial markets, private investments, including startup companies and real estate, can be the smoothest bets when the economy turns south.
Smooth is fast. Slow is smooth. Just ask the SEALs.
The classic Navy SEAL approach is to encourage deliberate movement toward a goal because taking the extra effort to get things done right the first go-around is better than making mistakes and then having to fix them later.
Startups and other privately held companies tend to be less affected by market fluctuations than publicly traded ones because they don't need to worry about short-term stock price movements.
That means that during times when the markets are falling hard, some companies can even see their value rise, whether stocks or equity value from product or service development.
Startups can still thrive during economic recessions.
The best startup ideas are the ones that address a real need. If there's anything we've learned from the Great Recession, it's that when times get tough, people really start thinking about their needs.
And because these needs tend to be pretty basic (like health and food), during recessions, people often come up with new ways to satisfy them. So in a recession, it might be a good idea if you are a startup founder to look at your company and ask yourself whether it solves a problem that people are having right now. If not, it's not too late to add the feature, right?
The average recession since 2000 has lasted 16.5 months. If a company can survive and grow during this period, it'll likely see increased investor interest once the economy recovers. Those companies that do survive often have an easier time getting additional funding once the market starts to move again… while publicly traded companies that fell are left struggling to return to where they were before.
And, those public companies may face a new reality—one that their deeply rooted business models might not align with anymore...
Startups are agile because they're defined by their ability.
Startups are usually much more agile than large corporations. They're able to quickly test out ideas and products without having to wait months (or even years, yes, years) for approval by upper management.
A company with ten or twenty employees is much more likely to successfully pivot its operations than a large corporation with thousands of employees. Smaller companies often have fewer layers of management and bureaucracy that slow down decision-making and implementation.
Startups also tend to have lower overhead expenses and less need for expensive offices and equipment. And finally, they're usually easier to - start up and run. Who would have thought?
Recessions tend to give startups an advantage.
For most small business owners, a severe economic downturn isn't something they're prepared for. However, there are some benefits to be had from a severe economic downturn.
Often during recessions, most products and services become cheaper because they're necessary; which means some of a company's basic necessities can be less expensive. At the exact same time, layoffs at larger companies (or struggling companies), can give new hires a fresh pool of qualified candidates. Those unemployed are eager to find jobs again.
Recessions can be good for startups because they allow them to weed out weaker companies. They can open up new markets for the survivors to take advantage of. Together these two things can provide the perfect environment for innovation.
The point is, recessions have often been followed by booms.
Many of the biggest companies in the modern economy were started during the Great Recession, from Airbnb to WhatsApp.
Even before the tech bust, recessions were fertile grounds for startups that turned into industry disruptors. General Motors was founded in 1908 during the great depression. Hewlett Packard was born during the Great Depression. Microsoft emerged from the energy crisis of the 1970s.
Short-term recessions, stock market pullbacks, and economic downturns are historically some of the best times for startup founders to start companies. They offer long timelines, low costs, flexibility, and growth potential. These opportunities can be resilient against financial chaos.
All in all, startup investing during a recession via venture capital opportunities can be some of the most rewarding investments an investor can make.