Why startup investments might be the best option during a recession

As the world’s top business leaders and economists converge in Davos for this year’s World Economic Forum, inflation and the risk of a potential recession are looming in everyone’s minds.

Earlier this month, the S&P 500 hit its lowest point in over a year. Some economists predict it will plunge even further, triggering a prolonged bear market that will rival the conditions that led up to the 2008 recession. 

Inflation hit a 40-year high this spring, driving the Fed to raise interest rates by half a percentage point. That’s because, over the past 75 years, any time inflation has exceeded 4% and unemployment has gone below 5%, the U.S. economy has gone into a recession within two years. Last month, inflation clocked in at more than double that threshold.

The public markets are in turmoil—but the private markets are alive and well. In the first quarter of this year, $82.8 billion went to early-stage companies in the U.S. alone. And while that number was 11% lower than the quarter before, it’s still the fourth-biggest quarterly total on record.

That’s because private investments are, at least in part, impervious to the ups and downs of the stock market. That makes them an incredibly attractive option for investors seeking safe harbor from the storm. Here are five reasons why private investments—like startups and real estate—might be the best options during economic pullbacks.

Slow is smooth, and smooth is fast

The classic Navy SEAL philosophy is all about encouraging slow, calculated motion towards a goal—because taking the time to do something right the first time is faster than rushing into pitfalls and mistakes.

Because startups and other private investments have such long time horizons—five to ten years on average—they often follow that same philosophy and typically aren’t impacted by the ups and downs of the public markets.

That means that while volatile market conditions are tanking blue chip stock prices and leaving stock market investors holding the bag, many startups will make it through to the other side without ever losing a penny in value. In fact…

Startups can still grow during downturns

The best startups are the ones that solve a problem—and if there’s one thing we know about economic pullbacks, it’s that they make problems more bothersome, not less. That means for some types of companies, recessions can actually mean better business—especially those that solve problems related to critical necessities like groceries and healthcare.

The average recession since 1900 has lasted 15 months. If a company can make it through and demonstrate both resilience and growth, they officially have a compelling proof point to show investors once the chaos subsides. In other words, these survivors might have an easier time raising more capital once money is moving again… while publicly-traded companies that tumbled are left trying to get back to where they were before the downturn. Moreover, those public companies may even find that they’re waking up to a new normal—one that their deep-rooted business model might not align with anymore…

Startups are agile by definition

Privately-held startups, especially in the earliest stages, are much more nimble than deeply entrenched mega-corporations with thousands of employees. That’s because building a business from the ground up is often a matter of trial and error. That first prototype of a product might not work at all; early market assumptions might be proven wrong in focus groups; and a company’s third, fourth, and fifth hire might all be working in a new industry for the very first time.

Simply put, a company with ten or twenty people on staff is much more likely to be able to pivot its business operations than one that has to hold shareholder meetings in order to make a minor change. It may also be easier for a small company to cut costs (for example, by downsizing office space or working from home). In fact…

Recessions may actually give startups a boost

Obviously, not all small businesses have what it takes to survive a severe economic crisis. But for companies with a solid business model, a recession can actually come with a couple of sizable perks.

For one thing, during a recession, most goods and services get cheaper out of necessity—which means some of a startup’s basic needs can get less expensive. At the same time, layoffs at bigger companies (or struggling companies) can provide survivors with a fresh pool of high-quality talent, many of whom are eager to find work again.

Finally, recessions can help “weed out” a startup’s less fit competitors—opening up new pockets of market share for the survivor to claim. These factors combined can create the ideal conditions for innovation. Consider this:

Past recessions have bred unicorns

Many of the world’s largest companies today were founded during the Great Recession, including Airbnb, Uber, Slack, Groupon, WhatsApp, Venmo, Instagram, and many others.

Even before the tech boom, recessions were fertile ground for startups that became market movers. General Motors was founded during the recession of 1908. Hewlett-Packard came from the Great Depression. Microsoft came out of the oil embargo recession.

In short: recessions, market pullbacks, and economic downturns have historically been some of the best times to found (and invest in) startups. With their long timelines, low costs, adaptability, and growth potential, these opportunities can demonstrate exceptional resilience against financial chaos.

So no matter what happens at the World Economic Forum this weekend, consider learning more about the companies raising on Republic today: