Last week, JPMorgan CEO Jamie Dimon warned of an economic “hurricane” he says is “right down the road, coming our way.”
He was talking about the looming possibility of a recession many economists believe is imminent… and according to Dimon, it’s time to start preparing for the fallout.
As an investor, there are a few steps you can take to get your overall portfolio storm-shuttered—but when it comes to startup investments, there’s not much to do except business as usual. In fact, evidence suggests that startups might actually be some of the highest-growth investment options during a recession.
Startups are agile, adaptable, and relatively impervious to the ups and downs of the public markets, thanks to their long time horizons. In fact, some early-stage companies might actually benefit from a recession—which is why these types of investments still have high growth potential even when the economy is sinking.
Here are 3 reasons why startups can thrive during a recession.
Goods and services are cheaper
You have to spend money to make money—especially when you’re first starting a business. Early-stage startups have to spend plenty of capital in order to grow (which is a big part of why they raise multiple funding rounds).
Not only does a business need more staff as it scales… it also needs to pay for things like larger office spaces, more benefits packages for its employees, more computers and other equipment, and so on. Cost to scale varies between different types of businesses; for example, a software company may only need to scale up its workforce in order to sell more licenses, while a consumer products company will need to manufacture more units, use more raw materials, and ship more packages to end destinations.
Regardless, growth means higher overhead costs—and during a recession, many goods and services naturally get cheaper. For a young startup, that can be a huge benefit.
It’s easier to hire great talent
During the Great Recession, 8.6 million Americans lost their jobs. Rising unemployment is a hallmark of a bad economic downturn—and while that’s a huge negative for most working-class Americans, it can free up high-quality job candidates that startups can scoop up.
Keep in mind that early-stage startups have incredibly lean teams… which means that every new hire needs to add as much value to the business as possible. As larger companies lay off experienced workers to cut costs, startups may be able to secure that same talent more easily.
Tough markets weed out competitors
A market pullback can yield obvious, tangible benefits for startups—but they still need to have what it takes to survive and succeed. In a bull market, like the one we just left, VC money is much easier to come by—which means that startups with shoddy business plans and high cash burn can keep chugging along for months or even years beyond their logical “expiration dates.”
In an economic downturn, it’s tougher to raise capital; not only do average check sizes decrease, but the time between rounds gets longer. In other words, most companies have to survive longer, with less money. Some businesses simply won’t have what it takes to go the distance—but as those lower-quality competitors drop out of the race, they free up new pockets of market share for the survivors to claim. It’s kind of like hitting the “fast forward” button on the competitive race.
Aside from those three main reasons, there are other qualities that make startups such resilient options during a downturn (check them out here). That’s why so many of the world’s biggest companies today—including Uber, Airbnb, Slack, Instagram, and many others—were able to grow and succeed despite being founded during a recession.
So while the stock market continues to swing wildly between extreme highs and lows… the private markets can provide investors with potentially high-growth opportunities that are, by their very nature, slow and steady. Consider adding private investments to your portfolio today:
Crowdfunding investments can result in total loss, and may be impossible to resell. Read about risks.
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