Startups are especially challenged during trying economic times because they are usually not profitable, are trying to grow rapidly, in search of additional funding, in the process of building an organization and usually understaffed relative to the amount of work they are undertaking.
So when an economic downturn does occur taking the traditional steps a well established company normally takes to adjust to the new reality is not always easy or even possible.
The steps a startup takes in an economic downturn largely depend on what stage the startup is in.
Looking For First Round Of Funding - In difficult times investors naturally become more conservative. However, this does not mean that they do not invest. A fresh startup might be exactly what certain investor groups are looking for. The prospect of a big upside in a relatively unknown might be more enticing then a second round of funding in an existing operation that already has some history.
Despite this potential enthusiasm a new venture should consider what it could achieve with less investment. The tactical approach is to assume that in 2 quarters the market and investment climate will start to improve. With this in mind if you received 1/4 or 1/2 of what you initially thought necessary to get started what could you get done with the investment. This amount of investment may be in line with what an "angel" investor may be willing to invest. Dealing with an angel investor is usually much easier then working with an established venture firm.
The key is not to get overly discouraged. Scale back a bit, look for a different category of investor and be prepared to be ready for a bigger round in 6 months.
Has Received A Round Of Funding And Has Not Launched - This is a good spot to be in if you can figure out how to create a 6 month window in which you do not need additional funding. You may have to cut back a bit. Take some off of the top for founder and management level personnel if you need to. Delay some equipment purchases and hires. However, be careful about layoffs. Layoffs have a devastating impact on a new company. You want to maintain a positive attitude during the tough times. Keep focused on what you can realistically do and keep the moral of the company high. Most importantly do not try to generate revenue. This may seem counter intuitive but unless you are one of a very small minority of new companies your revenues will most likely be below the initial predictions in your business plan. You will have to raise money in six months and you want to get it at a good valuation and you want to get the amount you need to take the company to market. Already having some revenue may result in you not getting what you need and at a poor valuation.
Has Received A Round Of Funding And Has Revenue - This is the most difficult position to be in. If you are already out in the marketplace you already have a bench market for valuation. You also have to grow the customer base and revenue during down economic times. That is hard for the most experienced companies. This requires you to work really hard to get the additional working capital before things get worse. You do not want to see a dip in customers and or revenue. You can rationally explain it but an investor may have an irrational response.
In most cases you will be asked to cut back spending to maintain equilibrium with the deteriorating market. It is what it is and layoffs, marketing spend, product development should all be equally considered so no particular group in the company is impacted more then another. The investment community will assume it and they will want to see that the management team is competent enough to pull it off without having an exodus from the company.
Ironically, when the market does recover your company may be in a good position because you are further along then the other categories of companies, you do have revenue an an established brand in the market. If you pull it off the investors will have made out handsomely based on the valuation they invested at during a difficult economic period.
Conclusion - The key for startups is to be patient during challenging global economic periods. By necessity it is a time to reassess the initial assumptions you had about the business and consider smaller investments to keep the business going. In some cases downsizing and taking a round at a lower valuation is a fact of life. If this is the case spread the discomfort evenly over the organization and remain confident that things will get better. You may be surprised at how successful you will become when the market picks up.