Why starting a business in a recession isn’t as crazy as you think

What are the challenges of starting a business during a recession?

What do Poundland, Pets at Home, and PC World all have in common? Other than the letter ‘P’, all three of these business empires were founded during a recession. Their success demonstrates that a downturn doesn’t always lead to a stall.

That’s not to say there are no challenges associated with starting up during a recession. Cash flow is perhaps the most obvious iceberg to spot. In the UK, inflation has sent virtually every business overhead climbing upwards – including business rates – pushing up supply chain costs and scuppering consumer spending.

Deepak Shukla opened three independent cafes in London this year. Despite considerable success so far, Shukla admits that rising fuel prices – triggered by the war in Ukraine – have driven up business production costs, as well as staff and utilities overheads.

“In this market, even break-even would be a success,” he says. “It requires a huge cash injection when you’ve got three cafes. You need basically £80,000-£100,000 per cafe before you see anything come back. I’m close to having already spent that.”

Borrowing is the usual antidote to this issue. But external funding also tends to dry up in a recession, as investors are less inclined to invest in untested ideas. High interest rates increase the risk of going into debt.

Ashlie Collins is founder and CEO of Humane Startup, a coaching, consulting, and training company that launched in February. Collins tells Startups she is self-funding her new company, “and my runway isn’t massive. It’s that age-old dance of providing your customers with the best experience and service possible [while] ensuring you keep the lights on in the process.

But, she adds, “it’s never easy, even in more bullish economic conditions. There is never a ‘right time’.”

As a statement, this is one that encapsulates how our startup owners are feeling. Some have registered a new company before, when the economic outlook was better. In both scenarios, they still risked failure.

“It’s always the case that the first year is very difficult,” Shukla argues. “I’m confident because the product is good, the customer service is good, [and] the marketing is good.”

David Clare recently launched integrated comms agency, The Monarchs, after working for over a decade in the industry. He puts things simply: “I don’t need an unstable economy to be nervous about starting a business. It’s already nerve racking as hell!”

Founder and managing director of The Monarchs, David Clare

Why should startups feel optimistic about a recession?

No new business is completely immune to the negative repercussions of a recession. All firms are vulnerable to change, and weathering the storm ahead will still necessitate smart budget planning and risk assessment.

But, even in a downturn, there are emerging opportunities that savvy leaders can take advantage of to accelerate business growth – particularly for startups.

Agility beats age

Recessions tend to hit SMEs harder than large firms. The latter typically have a larger financial cushion to fall back on, as well as more cost-cutting options such as selling assets.

Paradoxically, however, a silver bullet for startups looking to survive a slump is often their small structure. As we discussed in our guide to how to survive a recession, the real killer of most SMEs is an inability to adapt to a sudden market shock.

The winners in a poor economy are almost always those that adjust their business model to increase value for partners, shareholders, and customers. And the good news is that newly-registered firms are much more agile than larger competitors.

In a newly-formed company, both customer base and market offering are less well-established. Decision-makers will find it easier to pivot to a model that’s more likely to ensure survival in the short-term – and gain a substantial return on investment in the long-term.

“One of the biggest assets for starting a business in these conditions is a beginner mindset”, says Ashlie Collins. “You get to throw the rulebook out here – if you are brave enough – and plot your own course.”

One person who knows this well is Geoff Turrall, founder of CarCloud, a digital platform that helps drivers to manage car ownership in one place. The platform has been in development since 2019 but launched earlier this year. During that time, the company has adopted a four-day working week to keep running costs to a minimum.

“We’re [also] based in Birmingham city centre, but roughly 80% of the team work remotely,” Turrall says. “We’re keen to maintain this flexible approach to working as the company continues to scale.”

Customers are looking for the new

Established businesses that designed their business plan before any sign of market decline will now find themselves in hot water. Customer needs will change as their money doesn’t go as far, leading them to look elsewhere for products or services.

This creates excellent growth conditions for startups, which can capture the attention of these audiences as they shop around for a deal that brings better value.

Turrall found that tough economic conditions meant people were holding onto their cars for longer – in part due to financial pressures, but also as a function of changing commuting patterns.

“This [gave] us a much larger target audience than we’d originally anticipated,” he says. “ We now have 72,000 active users and 87,000 total vehicles under management.”

Charlie Rosier has also capitalised on a shift in demand. Rosier is co-founder of Babbu, an online nursery aiming to democratise access to early years education. Post-pandemic, the childcare sector in the UK is in crisis; millions of children are missing out on structured learning and development opportunities due to affordability.

“The demand for an online nursery has never been greater,” says Rosier. “We don’t feel nervous, as the time is right in the market now for Babbu.”

Charlie Rosier with Babbu co-founder, Tyrell James

Still, Rosier warns that, while you might think customer demand is growing for your firm, it’s best to first take the time to be confident.

“It is very easy to get initial feedback and data without spending much money,” she states “[Waiting] will make your fundraising journey that much easier.

Alternate revenue streams

Meeting new customer expectations doesn’t have to require an entire rethink of your firm’s strategy. Business owners might also choose to introduce an additional service or product that might be better aligned to the current market and improve profits – even if just in the short-term.

Shukla reveals that his cafes have moved into corporate catering as a way to strengthen cash flow during winter.

“The budgets are better there,” he explains. “The money is better – and this catering is paying for the cafe. It’s those types of things that are leading us in the direction that we want to go.”

Retention will naturally increase

Small and medium-sized enterprises (SMEs) have faced a unique combination of staffing challenges in the post-pandemic era.

According to a poll by OnePoll, 95% of small businesses have experienced issues with recruitment in the past 12 months. Of these, more than a quarter reported problems with wage negotiations not meeting candidate expectations.

Handily, this is one problem that will likely slunk off over the next 12 months, as the cost of living crisis makes it less secure for people to change jobs. Retention rates will no doubt see a big upswing as your company can offer increased job security.

The financial benefit is obvious. Some studies, such as the Society for Human Resource Management (SHRM), predict that every time a business replaces a salaried employee, it costs six to nine months’ salary on average. For a manager making £40,000 a year, this equates to around £20,000 to £30,000 in recruiting and training expenses.

Another silver lining to a crisis? Struggling businesses will lose staff members, introducing a significant number of qualified individuals seeking work to the jobs market.

In a recession, companies are more reluctant to hire and often lowball their offers for talented workers. If you are looking to grow your workforce, develop a more strategic hiring strategy that capitalises on a strong employee benefits package or attractive organisational culture.