How to recession-proof your startup
In the first half of 2022, major tech companies experienced mass layoffs, hiring freezes, and down rounds indicating that we are entering an economic downturn. Unfortunately, history has proven that the majority of early-stage startups don’t make it through recessions due to their reliance on investment capital, high burn rates, and the lack of consistent cash flow.
The “Growth” Mindset
For years many venture capitalists have encouraged their founders to have a “growth-at-all-costs-mindset” meaning that founders should raise as much capital as possible and worry about being profitable later.
“A growth-at-all-costs mindset is a recipe for out of control burn and topsy-turvy unit economics.” – Karen Rhorer via First Round
The problem with a “growth-at-all-costs mindset” is that it’s unsustainable especially during a recession where founders have to cut costs, lay off employees, and try to raise more capital when investors are closing their checkbooks.
Without a solid business model these “growth-at-all-cost” startups are usually the startups that crash and burn first because they run out of cash.
(For Example: Fast, the easy checkout startup, shut down after burning through investors’ money)
Cash Is King
Startups who have a “customer-first-mindset” and are profitable are most likely to thrive through economic downturns because…
- Consistent cash flow with healthy margins allows you to scale up and back without jeopardizing the lifeline of your company.
- Cash in the bank means you can operate your startup without sacrificing your company’s valuation in a down round.
- You have the opportunity to hire great talent from larger tech companies who are doing mass layoffs.
Prepping For A Recession
Here are 3 things to consider when planning your startup for a recession.
- Get familiar with a cash flow statement. It takes into account every single dollar, down to the penny, on how cash is moving in and out of your business.
- Calculate Runway. Cash reserves divided by your monthly burn rate (monthly expenses) will give you the number of months you have left until your business runs out of money.
- Operate as lean as possible. Do more with less, automate processes, and maximize productivity. Be a Minimalist Entrepreneur.
Helping Founders Become Recession Proof
In closing, the name of the game is survival and having a sustainable business model will help you thrive through an economic downturn. Profitable startups are commonly associated with slower growth but as the old saying goes “slow and steady wins the race.”
If you’re interested in building a recession proof startup apply to Square One Startup School’s next cohort to accelerate your path to profitability. https://squareoneschool.com/application/
Spot on about calculating runway. One nuance I'd add: the standard "cash / monthly burn" formula gives you a flat number, but if your burn is increasing month-over-month (hiring, scaling infrastructure, increasing ad spend), you need a dynamic model that accounts for growing expenses. The real runway is almost always shorter than the napkin math suggests. I built an Excel-based Startup Runway Planner that does exactly this — 24-month cash flow projection from a single assumptions tab. You plug in your variables and it shows you the exact month cash hits zero under different scenarios. It's part of a "SaaS Starter Toolkit" on Gumroad alongside a metrics dashboard and fundraising CRM. Sometimes the simplest tools catch the problems the fastest.
It's hard to talk about being recession-proof without mentioning the niche IMO.
I have a friend who provides luxury goods. His business is hit. I mean really, really hard.
With some niche markets, you'll just need to pivot. Just like many businesses pivoted to online-only during the pandemic.
Would be curious to hear that side of the story. Anyone here has any experiences pivoting during an economic crisis?
True but I also think planning for business for pivots are way to be recession proof as well. For example, we started squareoneschool.com at the top of 2020 (pre-pandemic). The program was a mix between in-person and virtual. When the pandemic hit it was easy for us to transition into being a 100% virtual program because we were already doing some aspects of virtual.
Not relying on one distribution channel or revenue stream would allow your business to be flexible in an economic downturn.
Bootstrappers have a mantra, which I believe came from @patio11: "Charge more."
It's great advice. I can't tell you how many times I've heard people say that they charged too little in the beginning, and that increasing their prices had no impact on (or even improved) customer acquisition.
But here's my question: How does this hold up in a recession?
Adding dark mode will definitely help!
Right! When things get dark, turn on dark mode 😂
This is an awesome read and something I am fascinated with. Do you believe that no code has a place to recession proof a business? It is affordable and great to validate startup ideas. I would love to hear your thoughts on this.
Thanks! I believe no code can defiantly fit under being recession proof because native built products require hiring highly technical people with high salaries (respectfully so) compared to no-code built products that are plug-and-play and no-code developers have more reasonable salaries. No-code will help your startup stay lean regardless of any economic condition.
In early 2022, major tech companies faced layoffs and hiring freezes, signaling an economic downturn. Most early-stage startups struggle during recessions due to reliance on investment capital. The “growth-at-all-costs” mindset promotes unsustainable practices, leading to severe consequences during tough times. Founders must prioritize building a solid business model over rapid growth. A Block Blast approach can help pivot towards sustainable strategies and avoid a crash that many face in challenging economies.
Building a recession-proof startup starts with the idea, so it's a good idea to consider this when ideating/validating your product.
Products that always seem to do well IMO are products that help people to make money. I feel like a lot of indie hackers have products like these, so that's great news. But it's a good time to double down on that and make it clear to your customers exactly how much they're making (or saving) because of you. Even if your product isn't helping customers make money, make your value incredibly clear. Put it front-and-center in black and white.
Nice, great read and important for all indie hackers to consider right now. This is why bootstrapping is the best.
I miscalculated my runway for my first project and that ended up doing me in. I think that this article offers a great rundown. Curious if people use different techniques to calculate runway?
https://founderscpa.com/calculating-burn-rate-runway-startups/
Great read, thank you. Can we also apply this to bootstrappers? Many wbe members are full time makers and we are all a bit scared of this crazy inflation...
Yes, but I think as bootstrappers you have to be very mindful of your unit economics because majority of bootstrappers do not have a large lump sum of cash in their bank accounts that they can rely on which most venture-backed startups do. So accounting for every dollar is crucial for a bootstrapped startups survival in a recession.
More supporting data for your claim of "mass layoffs" would be appreciated. That generalization doesn't seem to be entirely accurate. It's true that Twitter has laid off a lot of employees from their HR department, which makes sense given that they aren't hiring as frequently. Facebook is also stopping new hires because they're currently flailing. However, I don't believe the layoffs you were referring to have actually occurred yet
https://heardlegame.io/
Here's a list of notable tech layoffs that have happened in 2022 thus far: https://news.crunchbase.com/job-market/tech-layoffs-analysis-h1-2022/?utm_campaign=The 2 Percenters%3A Newsletter&utm_medium=email&utm_source=Revue newsletter
What are the tips for pricing saas products?
I'd like to see more evidence to support your point about "mass layoffs". I don't think that blanket statement is that true. Sure, Twitter has layed off lots of folks in their HR department, and that makes sense since they aren't hiring as much. And Facebook is freezing their hiring given that they're, well, floundering at the moment.
But I don't think the layoffs you were discussing have even really happened yet. I'd expect the real layoffs to begin in the first half of '23. By then, the Fed will have already hiked the interest rates up and rug-pulled the markets.
Here's a list of notable tech layoffs that have happened in 2022 thus far: https://news.crunchbase.com/job-market/tech-layoffs-analysis-h1-2022/?utm_campaign=The 2 Percenters%3A Newsletter&utm_medium=email&utm_source=Revue newsletter