Why starting a business in a recession isn’t as crazy as you think It feels nerve-wracking to start a business during a downturn - but are these fears unfounded? We speak to five new startup owners who are optimistic about the year ahead. Written by Helena Young Updated on 12 October 2022 Our experts We are a team of writers, experimenters and researchers providing you with the best advice with zero bias or partiality. Written and reviewed by: Helena Young Lead Writer In an ideal situation, entrepreneurs would start their business just as the economic outlook turns sunny and consumers are throwing money around, desperate to spend.Sadly, the UK economy has not been ideal for some time now. Since 2008, the markets have navigated fallout from two general elections, Brexit, and the COVID-19 pandemic. Many businesses didn’t survive this onslaught, but, in that same period, plenty of success stories have also thrived.If you’re debating starting a business right now, then don’t be scared away by the big ‘R’ word. Successful entrepreneurs don’t sit around waiting for the financial graphs to grow.While it might sound counterintuitive, recessions can actually create the perfect mix of innovation and creativity that can spark a meteoric rise. Plus, the inevitable business failures will also create plenty of gaps for new businesses to expand into.Startups has spoken to five business owners – all of whom launched their company in the past 12 months – to hear more about the advantages they’ve uncovered, and the hurdles they plan to overcome. This article will cover: What are the challenges of starting a business during a recession? Why should startups feel optimistic about a recession? Conclusion 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 ageRecessions 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 newEstablished 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 JamesStill, 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 streamsMeeting 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 increaseSmall 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. ConclusionDespite the difficulties facing small businesses right now – particularly when it comes to finance – there are still plenty of growth opportunities for startups in the current economy.Outside of impressive statistics and bold predictions, the simple fact is that after the crash comes the recovery. Firms that can get through the next two years, having taken advantage of a reduced or weakened market, can set themselves up to leap ahead of the competition and emerge triumphant.There will always be an element of risk. But scaleup is still possible to pull off with the right, customer-centric strategic planning.David Clare offers his own perspective: “The uncertainty is a huge challenge, but it’s also a great opportunity – and the mindset of seeing it as such is what I believe will help businesses be successful, despite the economic climate.” Share this post facebook twitter linkedin Tags News and Features Written by: Helena Young Lead Writer Helena is Lead Writer at Startups. As resident people and premises expert, she's an authority on topics such as business energy, office and coworking spaces, and project management software. With a background in PR and marketing, Helena also manages the Startups 100 Index and is passionate about giving early-stage startups a platform to boost their brands. From interviewing Wetherspoon's boss Tim Martin to spotting data-led working from home trends, her insight has been featured by major trade publications including the ICAEW, and news outlets like the BBC, ITV News, Daily Express, and HuffPost UK.