Turning up in a downturn: How to endure (and thrive) through economic stress
Four steps leaders can take to steer businesses and teams through tough times.
If you’re a founder, uncertainty comes with the job. Where will your business be in the next five years? Scratch that — the next five months? There are so many factors, internal and external, that play a role in that answer, and all those factors can feel like moving targets at times.
But there’s one factor that can be especially tricky to navigate: economic uncertainty. And when news and social media feeds, Slack chats, and casual conversation are filled with mentions of rising inflation, increasing borrowing costs, and plunging stocks, it can cause anybody’s — not least a founder’s! — anxiety levels to skyrocket. Could a downturn be looming? A recession? A full-blown depression, perhaps?
While nobody can truly predict the future, what you can do is plan ahead to prepare for such an outcome and, if you’re already feeling the impact, navigate the challenges intentionally, aligned with your values. To aid you along that path, we’re sharing strategies and tips to help you lead your business with foresight and integrity when economic times get tough, and ensure your business (and workforce) sticks around for the long haul.
Acting fast doesn’t mean acting without heart
It’s hard to imagine a scenario in which a founder isn’t grappling with some aspect of economic uncertainty today. To address what appeared to be an ever-growing list of reasons for founders to worry about the economic outlook — global conflict, inflation, and supply chain concerns among them — startup accelerator Y Combinator sent an email to its portfolio companies earlier this year. The message was blunt: “Things don’t look good.” The email outlined tips to better handle economic downturns, including extending your runway, rethinking fundraising expectations, and acting fast.
The accelerator’s direction to plan and act was warranted. After a period of explosive growth, 2022 has been characterized by sudden layoffs, job offers being rescinded, and hiring grinding to a halt in the tech industry, specifically. (Layoffs.fyi, which collates tech company layoff data, suggests that there have already been over 91,000 tech layoffs from January through mid-October of this year.)
Early-stage companies, which generally aren’t yet profitable and rely on venture capital, can be especially hard-hit by a downturn, but all businesses are potentially vulnerable. In late July, Shopify (founded in 2006 and with $2.93 billion in revenue) cut 10% of its workforce after their bet that current consumers would spend more via ecommerce didn’t pay off. Long story short: Businesses of all shapes and sizes can feel the impact of economic uncertainty.
Against this backdrop, the ability to act quickly to mitigate loss and shore up reserves is imperative. That said, as a purpose-driven founder, this is also a moment to focus on your values and act with intentionality, rather than rushing into a situation without the requisite diligence.
It can feel like a tricky balance, but remember that it’s possible to act in your business’ best interest without leaving your values behind.
From committing to the type of leadership that’s required to navigate uncertainty to adjusting your finances appropriately, these four tips combine the thoughtful with the practical, helping you traverse tough economic times — whether that happens next quarter, next year, or further down the line.
1. Communicate with confidence and transparency
When economic uncertainty is afoot, your team will look to you, as the founder, to set the tone and respond to the challenges. Showing up authentically and communicating transparently through this period — and always, really! — is essential.
Honesty is the name of the game here. As Dan Nelson, co-owner of The Ruby Tap wine bar and senior director of product and design at Tock, said on Zapier’s “Managing your business in economic downturn” webinar: "I think it's tempting in any sort of crisis or fire to present this fake facade that everything's fine and to be overly positive. [...] I think what people want to see more than that fake facade is that you've got somebody in charge who can lead through these changes or moments. And so we're honest but incredibly confident. And when you present that confidence, I think that people then start to just trust that whatever we have to do, we've got somebody in charge who's capable."
When transparency doesn’t happen, there’s ambiguity, and ambiguity can negatively impact your entire team’s mental and emotional health. Nobody knows what’s actually going on, if they should be worried or not, or if they should start thinking about job-related backup plans. Meanwhile, as Dan touched on, presenting a fake facade (which could be defined as “toxic positivity”) is potentially harmful — sudden surprise benefits no one, and it stings so much more when it’s wholly unexpected.
Transparent communication that’s confident and happens regularly is vital. A Forbes article by Mark Schopmeyer, CaptivateIQ’s co-founder and co-CEO, offers useful tips:
Provide the necessary education. Some folks might not know what certain finance and business-related terms, acronyms, metrics, or outcomes mean. So when holding something like an all-hands where you’re discussing updates and/or changes, keep it inclusive and clue people in as you go.
Recognize the limits to transparency. While consistent, open communication is certainly required (now more than ever!), there is such a thing as over-communication which verges on distraction, so be sure to set appropriate business and personnel boundaries.
Develop a consistent message. Everybody needs to be reading from the same page, so keep your message consistent — it’ll help keep all staff members unified and aligned on what needs to be done going forward.
2. Lean on your board — you might be leading, but you’re not alone
It’s natural to feel anxious when the economic outlook is uncertain. What does the worst-case scenario look like for the business? What does the best-case scenario look like — and is it achievable? Can you do what’s needed to stay on the path to reaching profitability before you run out of money?
All of these questions will likely surface — repeatedly — as you work to plan and act in the face of an economic downturn. When they do, remember to tap your board of directors (or advisory board). These folks are dedicated to your success, and their expertise and experience can go a long way to guide your strategy and provide support.
If you have members on your board with extensive knowledge of navigating an economic downturn or recession specifically, leverage their expertise ASAP — after all, sharing their know-how is what they’re there for. For numerous reasons, the stabilization and success of your business is important to them, too.
Baiyin Murphy, a general partner at the pre-seed and seed-stage venture capital firm Indicator Ventures, noted: “...particularly at the early stages, the more you communicate with your board the better.” To that end, she advises founders to reach out regularly, beyond official board meetings, and seek the insight they have joined your venture to contribute. “Don’t underestimate the amazing resource your board can be for the business and for you, as a founder,” she said.
3. Assess and refactor your finances
Next we come to money. Here, you’ll be looking at two particularly important steps for assessing and refactoring your finances during economic turmoil: extending your runway and deleveraging.
Analyzing — and then adjusting — your runway is strongly encouraged. As a quick reminder, a cash runway is the amount of time a business can keep operating before it runs out of money, assuming no additional funds are raised. (Runway = cash balance ÷ monthly net burn rate.) Jenny Bloom, a fractional CFO and growth advisor who’s worked for the likes of Mailchimp, recommends having at least two years of runway if possible.
The act of examining — and extending — your runway helps ensure that what you’re spending works for whatever economic reality you’re facing. Sinduja Pk at Chargebee, the billing and revenue management platform, noted that one of the most impactful initial steps to take in this process is to segregate the spend and then cut discretionary spending. Scrutinizing and forgoing non-essentials where possible — in alignment with your values — and making cuts and operational improvements bit by bit will help you stretch your runway out into the future.
For instance, in terms of travel, moving from in-person company retreats to virtual retreats and team-building sessions is a great spend-saving move, as is cutting down on or pausing non-essential business travel. Meanwhile, when it comes to office space — a significant overhead for many — could downsizing outright and/or pivoting to a remote working model be a smart, viable choice?
Another priority step to consider as a planning precaution or early in a downturn is to deleverage. Specifically, clearing your balance sheet by raising capital or selling off assets to clear debt can allow you to enter a period of economic turmoil with more optionality. While early-stage companies who’ve taken on debt to fund their growth may find this harder to do, companies that are highly leveraged have a far more difficult time navigating a downturn. The period that comes after a downturn can be difficult, too.
As Mihir Mysore, an expert partner at McKinsey and leader in crisis response, said on McKinsey’s podcast regarding economically resilient and non-resilient companies, “resilients” were those that deleveraged and optimized their balance sheets to create “both operational and financial flexibility to enable them to get through the recession.” In contrast, he noted, “nonresilients” grew their debt dramatically. “During the recovery, this flipped,” he said, “and resilients focused on increasing their leverage ratio while nonresilients continued to try to catch up and reduce their debt to capital.”
Adjusting your runway and deleveraging, then, can offer more options, flexibility, and leeway — which can very well make the difference both during and after economic turmoil. As Y Combinator wrote in their aforementioned email: "Remember that many of your competitors will not plan well, maintain high burn, and only figure out they are screwed when they try to raise their next round. You can often pick up significant market share in an economic downturn by just staying alive.”
4. Double down on people-first practices and policies
At the heart of any business is its people — the folks on your team whose efforts enable your business to pursue its mission. But when economic uncertainty hits, employees can be the first casualty. According to research from staffing firm Insight Global, four in five U.S. employees fear losing their jobs if a recession happens, with women and millennials feeling the most concern.
But while layoffs may appear to be low-hanging fruit for leaders looking to cut costs, they often aren’t a wholly effective cost-saving measure in the long term: When growth picks back up, money will need to be spent on hiring and training new (read: replacement) staff. To boot, and as former HBR deputy editor Walter Frick pointed out, “...the companies that emerged from the [Great Recession] in the strongest shape relied less on layoffs to cut costs and leaned more on operational improvements.”
So, if at all possible, consider flipping the script on layoffs for a longer-term win. By doubling down on and/or baking in more practices and policies that support folks’ lives in and out of the workplace, you can make powerful strides in developing a team that is more engaged, less stressed, and happier in their roles. The potential returns in retention, productivity, future recruiting efforts, and loyalty can be significant.
Here are a few impactful practices and policies to consider in this effort:
Maintain employee benefits that are integral to well-being. Adequate sick pay, robust healthcare insurance, a flexible time off program are modern-day necessities that should be retained at all costs, alleviating negative states of anxiousness, stress, and burnout.
Manage employees’ financial stress with educational sessions. As it stands, 77% of people in the U.S. are already worried about their finances. As Ron Smedley wrote on the Amtec blog, “Informing employees about how to stay afloat in a recession can help them feel less anxious. Consider holding brown-bag lunch training sessions on topics such as reducing credit card debt, making a budget, investing, 401(k) distribution, and living on a retirement income.”
Invest in employee training and development. Supporting your peoples' potential and growth (even if the economy isn’t growing!) via training, development, and career progression is a surefire way to unlock their skills and talents — benefits you can reap the rewards of at a time when hiring has slowed down or paused entirely. After all, cutting training and development rather than leaning into it will only lead to stagnancy and a lack of innovation.
Here for tomorrow, today
Knowing that tough economic times may be on the horizon isn’t what any founder wants; building a successful business is hard enough without these added complications and stresses. But by committing to the type of leadership that’s required for the times, communicating with transparency every step of the way, leaning on a knowledgeable board, adjusting your finances appropriately, and maintaining people-first values — you’re putting yourself, your business, and your people in a far better position. And when you’ve endured, think of it as a testament to your resilience.
Before we close out, let’s remember that even during economic turmoil, there are growth opportunities to be clinched. Could your business better serve the customers of companies who are in a weaker position? Could there be the potential for company acquisitions and/or mergers to happen? With pragmatism and intentionality, there’s always the possibility your business won’t just survive, but thrive.
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