Following a pandemic paired with geopolitical tensions, we are now living through an unprecedented global recession. These events have, in turn, forced businesses to transform and adapt to face these new challenges. Particularly for startups, it’s been a strong storm hitting hard and is far from over. Recently, the founders of IdeaBits, Mayan Narendran (COO) and Dennis Surendra (CEO), sat down with Arteculate Asia to share their thoughts on how the startup environment has changed with the global recession and guidance for startups to navigate to calmer waters.
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How has the recession affected startups?
In a world where Cash is King, raising funds is the biggest challenge startups face today. The valuation of startups at all stages has been challenged while they face new pressures to generate steady revenues and profits. Hence, the more mature a business is – whether they’re looking for Series A, B, C, or D funding – they face more significant problems than those at the seed stage. However, both Mayan and Dennis observed a shortage of venture capital even at the seed level owing to the now higher financing costs.
As a result, technology businesses have to double down on the fundamentals. “The cost of services has dramatically increased, which has led to the need to keep a higher margin on their products. Accordingly, Mayan conveys that “Several of these young companies are looking to show a more attractive cash flow with layoffs to reduce costs.” With the global crunch for cash, he adds that profitability is critical; and investors focus heavily on product fit metrics such as retention and engagement over growth at all costs.
Adapting to the challenge of raising funds in a recession
According to Mayan, an essential play in creating profitable businesses in the present startup ecosystem is retaining existing customers and reducing churn. “Customer acquisition is expensive. Hence, the ideal strategy would be to retain customers by upselling popular products and services.” But, adding a word of caution, he says that careful thought must go into the strategy, especially when monetizing previously free products.
Moreover, the duo expresses that with venture capital becoming more expensive, debt financing is proving a more viable option for startups to explore. “Going to a bank in Sri Lanka is not cheaper, but banks in the US are more lenient to startup ventures as they consider only the revenue for growth,” expresses Dennis. With this, he added that, at the moment, VCs require businesses to give up a bigger chunk than owners would like. This gives bank financing the added advantage of complete business ownership and instills careful management of its cash flows.
What startups need to get right to sail through the storm
As the world returns to a state of ‘new normal’ amidst turbulent times, Mayan and Dennis share their tips and pointers on three key aspects when it comes to building successful businesses amidst a recession:
Retain talent and avoid layoffs
Over the past few months, the technology industry has been rocked by tens of thousands of layoffs as even the largest companies seek to cut costs. However, Dennis emphasizes the importance of retaining talent for startups considering layoffs. “The reality is that human capital is easy to expend and expensive to recover.” Hence, layoffs must be an absolute last resort to be considered and only after all other options have been exhausted. Reflecting on the local context where the industry is losing talent through migration, IdeaBits opted to peg salaries to the Swedish Krona with timely increments ahead of inflation.
Pricing products and services
When it comes to building high-value products, Mayan states that entrepreneurs need to look at past trends and the current state of the business world with rising inflation demands that companies revise the prices of their offerings. Yet, this is only possible if they have a keen understanding of their customers and can offer additional value to justify the increase. But on the flip side, rising inflation also gives businesses bargaining power to negotiate down service providers’ prices. Therefore, it is critical to focus on the fundamentals to grow and survive.
Hybrid working arrangements to enable innovation
“Another trend we have seen is that businesses that used to operate completely remote are now looking at hybrid work environments to foster the relationship between teams,” observed Mayan. However, contrary to cutting down expenses with work-from-home models, there is an unseen cost in running businesses entirely from behind a screen. This invisible cost is lost collaboration that hinders innovation, which will hurt the long-term prospects of any business. Therefore, he advises entrepreneurs to look at models where office and remote work are balanced to get the best of both worlds.
The promising future for startups following the recession
Looking at the silver lining, Dennis shares that everything moves in ebbs and flows. Therefore, he foresees a significant upside that is to come following the current recession. Enterprises have made permanent changes in their business model now that would lead to staggering cash flows in the future. “For example, applications based on free users have now been monetized to create a clear path to profitability.” Further, the duo observed that an increased global turnover from tech companies has resulted in a startup boom.
This next wave of companies, led by experienced personnel laid off from tech giants, has shown a strong drive to build the next big thing. Their knowledge of the industry and its niches has already driven advances in AI and Data Science. These advancements are poised to elevate talent in several industries toward high-skilled jobs. Hence, AI is dubbed as the great equalizer of our times that’ll break down old barriers to opportunities. In turn, startups at the forefront of these trends are poised to seize an invaluable chance to build world-changing products.
Ultimately, while there are several challenges today, those companies that weather the storm and transform will be tomorrow’s industry leaders. As part of their final thoughts, Mayan shares that “Challenges are a part-and-parcel of an entrepreneur’s journey, and there’s nothing anyone can do about it.” He encourages entrepreneurs to enjoy the storm; for there is no success without failure, and growth stems from chaos, not order. The world is in a dip, and no one knows its depth or when it will bounce back. “A correction is inevitable as things return to normal. In the present state of darkness, the best entrepreneurs are the ones that find opportunity.”
