Starting Up in a Downturn

Luke Sykora, Stanford University June 23, 2022

The past decade has been an exciting time for entrepreneurs. Venture capital was plentiful, AI and machine learning in particular drove revolutionary changes across numerous industries, and a constant drumbeat of high-profile IPOs kept re-filling the wells of private capital.

Now, though, things are beginning to change. Inflation is running rampant, the COVID pandemic drags on, interest rates are up, and the Russian invasion of Ukraine is testing an already fragile global supply chain. Global venture capital investment has been dropping since November 2021. In May, it reached the lowest point in more than a year and meanwhile, IPOs are being cancelled.

Even if my idea is really good, can I find success if the economic picture is so unpredictable?

Whether you’re a college student just starting to sketch out a business idea or an established team with a compelling product and some early traction, you’re probably asking the same question: Even if my idea is really good, can I find success if the economic picture is so unpredictable?

There’s no one answer to that question, and scaling just about any venture will be harder now than it would have been two years ago. That said, lessons from past disruptions can provide some guidance about how to navigate this one.

Our Entrepreneurial Thought Leaders series predates the dot-com bubble, and over the years we’ve captured stories from the dot-com boom and bust, the 2008 financial crisis, the COVID pandemic, and numerous other shocks and disruptions. As we enter another period of market uncertainty, these insights are especially timely and relevant. Here, we share a dozen experience-tested insights about innovating amid disruptions and downturns.

Remember, there’s no “right time” to start

Pointing to Google as an example of a company that continued to grow despite the dot-com crash, Instagram co-founder Kevin Systrom emphasizes that there’s no macroeconomic “right time” to start a company. Instead, he finds, entrepreneurs need to figure out what the right time is for them, and develop the appropriate set of skills and connections before launching a company. If the idea is good enough and the entrepreneur is ready to go all-in, he believes, the company will succeed in any climate.

Take advantage of the new green fields

In a downturn, one advantage for new ventures is that old ideas and businesses are being swept away, and there’s suddenly a large pool of newly-unemployed management talent to draw from.  Here, former Twitter CEO Jack Dorsey tells the story of co-founding Square in the middle of the 2008 financial crisis. If you can find an opening, he says, “a recession is a great time to start a company.”

Diversify your customer base

Former Symantec CEO John Thompson observes that, if a company is to survive challenging economic times, it must have a diverse customer base. That often means going beyond the big Global 1000 companies and the US market. “Software companies that had a very diverse not only geographic reach, but customer base, have found an opportunity to continue doing well even in challenging economic times,” he says.

Get back to bootstrapping

Speaking on the heels of the dot-com bust, Heidi Roizen (now a partner at Threshold Ventures) observes that when venture capital is scarce, the best companies thrive by working hard and funding themselves with revenue rather than venture capital investment. “Profit is nature’s way of telling you that you’re making something of value,” she says. 

Seriously, don’t underrate simple profitability! 

Google was one of the dot-com companies that emerged from the dot-com crash stronger than ever. Why? Google employee #20 and former Yahoo! CEO Marissa Mayer points to one key reason: From early on — unlike many venture-funded startups of its day — Google was focused on quickly achieving profitability.  

Stick with your principles

Often, a down economy forces founders and leaders to make tough tradeoffs. And those tradeoffs are much easier to navigate if you have some strong principles. In this podcast episode, Jazz Pharmaceuticals CEO Bruce Cozadd explores how he leaned on his principles when his company hit a wall during the 2008 economic crash. In particular, he shares how his principles steered him toward a unique approach to layoffs, which ultimately gave him the opportunity to hire back most of the employees who were let go during the depths of the recession.

Don’t expect everyone to like you

Especially in hard times, says Hipcamp founder and CEO Alyssa Ravasio, it’s impossible to build a company and get everyone to like you. To lead an organization through rough waters, you need to prepare yourself to accept some uncomfortable reactions to your decisions. And negative reactions, she adds, don’t mean you are wrong.

Rethink what “growth” means

Speaking in 2003, serial entrepreneur Judy Estrin offers several tactics that can help ventures survive a downturn: Adjust the business model and expenses to accommodate a slower growth curve, don’t cut your “burn rate” to the point where you simply bleed your company to death, look for areas of incremental growth (even if they seem a bit boring), and become the type of leader who enables tight, efficient execution and flexibility rather than explosive growth. 

Keep your sense of humor

Humor isn’t just a personal coping mechanism — it can be a legitimate management strategy. In this clip from his 2008 ETL talk, Joie de Vivre Hospitality founder Chip Conley explains that maintaining a sense of humor and creativity when delivering bad news can earn you a lot of goodwill. In his case, a funny teeshirt helped smooth over the dreary financial picture he had to paint for his investors.

If you’re going public, be prepared for tough questions

Say you do manage to keep up momentum, and get to the point where you’re considering going public. How does the IPO process differ in a down economy? Dominic Orr, former CEO of Aruba Networks, experienced IPOs during the dot-com bubble and amid the Great Recession, and found them to be remarkably different experiences. In a downturn, he finds, you need to prepare yourself for much tougher questions about your filing documents and business strategy — because the investment banks are not just planning to flip a hot stock and sell it for a quick profit. 

Trust the power of human ingenuity

Speaking at the outset of the COVID-19 pandemic, Alibaba co-founder and executive vice chairman Joe Tsai invites us to consider wars and pandemics of the past, and take courage from the inherent human urge to bounce back. Human beings are by nature optimistic, he finds, and will always “look up rather than look down.”

Remember: The best companies will still get funded

Speaking in 2009, during the Great Recession, Microsoft’s then-CEO Steve Balmer points to several game-changing companies (General Electric, Apple, and even Microsoft itself) that were founded during economic downturns. “If you’ve got the right idea, you will get some funding,” he says. “The ideas that weren’t good enough shouldn’t get funded, and they won’t be funded today.” Investors and customers will be pickier in down economies, he observes, but those more challenging filters can be an opportunity to build a stronger business in the long run.