Starting up when the market's down

Published on February 16th, 2016

2009 was a bleak year economically. The subprime crisis of 2007 had led to the market collapse of 2008 and the worst global economic conditions since the Great Depression. Intuitively this wouldn’t seem like a great year in which to start a business. Investors were skittish, customers were constrained and loans were impossible to come by. All of this didn’t dissuade Travis Kalanick and Garrett Camp from founding Uber in March 2009, however. Six years later their company operates in 376 cities worldwide and has reached a valuation of $62.5 billion.

Uber wasn’t an anomaly either. Other successful Silicon Valley companies founded in 2009 include Pinterest, Square, Slack, Strava and many more. Looking at these companies reveals some elements of why a downturn is a great time to start. In fact, comparing the valuations of companies started in 2009 to subsequent years suggest it may have been one of the best on record for founders.

Grow with the market

Getting into a market at the bottom means riding the wave of recovery if you can get a foothold early on. You know you’re creating real value if customers are willing to spend money on your product when they’re constrained. As the market recovers and people begin to spend more, your business will benefit from existing customers increasing their spend with you, potentially, and new customers coming to it from a position of abundance. We know that existing customers trump new business - and a downturn is a great time to build a loyal base.

You are also likely to strike better deals with service providers and partners in a down economy. Service-based companies are hardest hit in a recession and are willing to go the extra mile for new business. They are also less distracted with other client’s work and can focus on what you need. As the market improves, those relationships will last and benefit from contracts that were put in place during down times.

When the water’s low, it’s worth getting your boat into the harbour so it can rise with the tide. We had to get an analogy about the ocean in here somewhere.

The marketing dearth

When markets go down, companies cut costs, and one of the first places they cut from, if 2008 and 9 were anything to go by, is marketing. Again, this is an intuitive reaction leading to businesses doing the opposite of what they should.

Research by MarketingSherpa, McGraw-Hill, The Harvard Business Review and others is conclusive: marketing is your best bet against a downturn. If your startup has money to market - and it should - then you gain a double benefit during a recession. Firstly, the big companies you’re trying to disrupt are cutting back and many of the other startups you’re competing with are focusing capital elsewhere.

Secondly, advertising platforms experience a slow in their business and have reduced pricing and special offers available. That billboard that seemed expensive in 2014 might not be so bad in 2016. You can also spend less and get more from online campaigns where keywords aren’t reaching the high bids they do when the market is strong.

The attention field is wide open for companies who burst onto the market with clever PR and marketing while times are tough. You can also be one of the positive voices in a negative market.

Opportunities are everywhere

A weak rand might be bad news for companies making money from South Africans, but is great news for those delivering products and services to other countries. If you can export your business from South Africa during this time you have the compound benefit of foreign currency being converted at higher rates and lower operating costs back home.

This is just one of the opportunities in a downturn. Research done by Booz & Company in 2008 found that consumers generally spend less during a downturn - especially on eating out, driving and shopping. That said, there are some categories that actually see an increase in spending, according to the report.

Two examples are pre-cooked meals and home entertainment. Because consumers are spending less on restaurants, prepared meals are a luxury that replaces the behaviour of eating out. Going to the movies, theatre or sporting events are considered expensive luxuries, but people will spend more on watching movies at home, video games and alcohol.

Where something is going down, there is almost always something else going up as a result. Smart entrepreneurs know how to spot opportunities - and possibilities are endless in a downturn.

2016 didn’t start out too well economically, especially in emerging markets like South Africa, but there is always something to be done about it. History also tells us that if you’re thinking of starting a new business, this might be one of the best times to do it.