Recession is a word that sends chills down the spine of many entrepreneurs. It is characterized by a massive upsurge in the rate of unemployment as well-established companies begin to lay off workers. Prices of commodities skyrocket as inflation rocks the economy, pay cuts build anxiety and people begin to spend less as a strategy to survive the worst. Stocks and real estate market dips. In summary, it’s a really bad time to be an entrepreneur, or is it? 

Let me start by saying, many big companies today were founded during a recession. Some examples are Microsoft, Uber, Airbnb, Square, Disney, and yes, Apple. One could argue that a recession is a great time to start a company. But why do so many companies fold up and lay off workers during a recession? One word, preparation. Recessions do not suddenly happen out of the blue, so it isn’t something that we can’t predict.

They are key indicators with which one can predict an economic downturn. A good analogy I found compared recession to the seasons in a year. We have summer and winter seasons. During the summer, you can plan your trips, take a well-needed rest and enjoy some time under the sun on a beach. But at the back of your mind, you are well aware of the fact that summer will end someday and winter will come. 

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Winter isn’t bad if you’re well prepared, just like an economic recession isn’t bad when you can position yourself to take advantage of the unique opportunities it presents. These opportunities are the reasons why it is good to start a company during a recession. Let’s dive in. 

5 reasons why you should start a business during the recession

#1. Big companies have a hard time adjusting to the shift

Recession is always a big blow to established companies who have made long-term plans on the speculation that the economy will keep thriving. So they go ahead to hire more staff and expand their operations. This translates to more overhead costs for the company and leaves them vulnerable to sudden changes such as those that precede a recession. But their vulnerability is an advantage to startups who have more flexibility and can adjust their business model without incurring so many losses

#2. Low-interest rates

Startups need capital and while many entrepreneurs will prefer to bootstrap their startup, it isn’t always enough. At some point along the line, you’ll need to find a way to fund your startup. There are many avenues to do so and one of these is borrowing from banks and other credit facilities. A recession presents the perfect opportunity to loan from banks because of lower interest rates. 

During recessions, the Central Bank may drop the interest rates to increase borrowing. This is referred to as Negative Interest Rates and it’s a tool used by the Central bank to stimulate economic growth through investment and increase consumer spending. Entrepreneurs with good ideas but no capital can take advantage of the low-interest rates to get a loan and fund their startup. 

#3. It is easier to get investors

The stock market dips during a recession so most investors will be looking for other ways to invest their money. With the right support, startups have a good chance of surviving and even thriving in a recession. Investors know this and it could make them more open-minded toward revolutionary startup ideas. 

#4. Less competition

Startups face a lot of competition from rival companies especially those that are already established in the industry. Although competition is good for business, it sometimes snuffs the light out of most startups at a very early stage. There are many different reasons why this may happen including a business model that fails to stand out from the competition. 

For more insight, you can read about how fierce competition caused these 39 startups to close up shop. What this says is that timing amongst other things is an important factor to consider when starting a business. For some entrepreneurs, a recession might just be the signal to step on the pedal and get their startup off the ground when the competition has its plate full of other concerns. 

#5. A pool of highly skilled workers to recruit on your team

Layoffs are a sad reality of an economic recession. As many companies struggle to cut their operational cost, one of their strategies is to lay off some workers. In many cases, these are highly skilled employees who had it not been for the recession, would not have lost their jobs. But flooding the job market with a talent pool of experienced and skilled workers works in favor of entrepreneurs who are just about to set up shop. The reason is that despite the low budget, entrepreneurs are more likely to recruit highly skilled workers to join their teams in a recession. As selfish as it may sound, these workers are better off working for less than they are used to getting compared to not having a job at all. 

Here is how startups can survive and thrive in a recession

So far I have discussed 5 reasons why it is good to start a company or business in a recession. But how about startups and small businesses that happened to be founded just before the recession hit? How do they survive? I will be straight with you, it is no mean fit for a new startup or small business to survive a recession. But that it is difficult does not mean it is impossible. There are ways a startup can survive a recession and even thrive in it. 

According to the Harvard Business Review, studies that focused on answering this question highlighted four critical areas that determine if a company can survive a recession or not. These areas are Debt management, Decision making, personnel management, and digital transformation. Let us talk about each area in detail. 

Debt management

Generally speaking, startups need to have solid financial management since they are often on a tight budget. Compared to most established companies, startups can be said to be very frugal and efficient when it comes to managing their funds. After all, they perfected what is known today as the lean startup methodology. This skill will come in handy during a recession when sales are lower than expected and less cash is available to run the company. Avoid debts as much as possible. 

Studies show that companies that are neck-deep in debt are at a higher risk of defaulting in a recession. The shortage of cash inflow can undermine the operations of these companies forcing them to take drastic actions like cutting down their workforce. To avoid failing, startups that find themselves in a highly leveraged position can deleverage by issuing equity or shedding their assets before a recession. 

Decision making

As a startup founder, you are faced with so many decisions daily. Some are easy while others are tough. This is nothing new, it comes with the territory. Many entrepreneurs (with time) become better at making decisions that have a huge impact on the company. This is not because making those decisions is easier but because they have gained experience along the way and can easily spot certain patterns that repeat themselves. But a recession is a different ball game for one reason - it comes with uncertainties. 

Recessions could sometimes put pressure on the company’s structure demanding rapid changes to be made in a relatively short time. As usual, tough times call for tougher measures to be taken and if you are not equipped to make this call, you may find yourself at the bottom of the barrel. One way to weather this storm is by being adaptable. As a founder, you must be ready at all times to adapt your decisions to the present situation. To help with this, it is advisable to seek the opinions and perspectives of others who may have experience dealing with such uncertainties. 

Personnel management

Mass layoffs may seem to be an effective way to cut costs, but by doing so, the company is equally losing valuable assets. These employees have valuable skills and knowledge most of which the company had paid for.  Not to mention the amount of money that goes into the hiring process. On average, it could cost a company upwards of $4,000. In addition to this, laying off workers at a time like this can hurt morale and lower the productivity of the workers. The anxiety that builds up during the process will hurt their performance. So instead of doing this, consider other measures of cutting costs such as hour reductions, furloughs, and performance pay. 

Digital transformation

This may sound counterintuitive but investing in technology is a proven way of surviving a recession. Let’s take the COvid-19 pandemic as an example. The pandemic swept across the world bringing with it high death tolls, fear, and anxiety and it crippled the economy of many nations. If there is one thing the market responds very well too, it is fear and panic. Recession followed shortly after the pandemic started and lockdowns were enforced all over the world in a bid to control the virus. 

With employees unable to come to work, many companies were forced to fold up. The companies that came out relatively unscathed are those that read the handwriting of the world and made the move to go digital in the nick of time. For a startup, investing in technologies can be a cost-saving strategy during a recession. Either by increasing productivity or by keeping the production cost low so that the company can deliver its products at a lower cost than the competition. 

Conclusion

To answer the question, can I start a successful business in a recession? Yes, not only is it possible to start a company during a recession, but it is also possible to thrive. In this article, I’ve discussed 5 reasons why a recession is as good a time as any other to start a business. Moreover, I have also outlined four areas to focus on if your company is to survive and thrive in a recession. To get an idea of what business you can start in a recession, check out this article on the top 9 startup trends in 2022.