Top tips for startups during an economic downturn

As the US confronts a bear market and heads towards a likely recession, technology companies and startups are already starting to take steps to protect themselves. News of hiring freezes, layoffs, and budget cuts have become common even at larger technology companies. For startups, a recession can dramatically change future plans and growth projections. While there is always uncertainty surrounding an economic downturn, there are steps that startups can take to protect their business and employees. We spoke with DigitalOcean experts on their advice for founders and startups during a time like this. Here are some of their top tips for startups to weather an economic downturn.

Control your cash burn

All of DigitalOcean’s experts agree–controlling cash burn is critical in a time when customer growth may slow and fundraising is likely to become more difficult. Controlling costs and extending your runway by closely examining the Return on Investment of all activities can help startups weather a recession. DigitalOcean’s CPO Gabe Monroy mentioned that investors are also more likely to give startups unfavorable terms now than in the past, which can have a negative long-term impact on businesses.

“Startups have to control their burn and delay having to raise money. If you do have to raise money, prioritize a clean term sheet over a bad term sheet, even if that means raising at a lower valuation. Startups often want to avoid a ‘down round’ so will raise money with poor terms, which is a bad long-term outcome for the business.” - Gabe Monroy

DigitalOcean’s CEO Yancey Spruill also spoke to the importance of being in control of your own future by generating free cash flow:

“When you generate free cash flow you don’t need outsiders to fund the business. If you build a company to make money you are in control of your own destiny, so startups should prioritize generating free cash flow as soon as they can.  They might be surprised that it doesn’t materially impact their revenue growth” - Yancey Spruill

Maintain a strong focus on customers and employees

Carly Brantz, DigitalOcean’s CMO, emphasized the importance of focusing on your customers and your employees at all times, especially during times of uncertainty.

“I’m always focused on what value we can provide to customers to make sure they are satisfied. Net new customer growth may slow during a downturn, so companies must be laser-focused on retaining and growing their existing customers and maintaining a strong Net Promoter Score and Net Dollar Retention rate.” - Carly Brantz

Employee retention is also important. As our recent Currents report demonstrated, companies both large and small continue to experience the effects of the Great Resignation and an ongoing developer talent shortage, with 42% of developers considering leaving their roles this year. With a hot job market and companies facing potential hiring freezes, leaders must retain and invest in their existing employees. Finding ways to engage employees while many companies remain remote can be difficult, but creating a culture of happy employees who are invested in your mission even during leaner times is extremely valuable.

Build flexible systems that can adapt as needed

Future growth can be hard to predict during a downturn, so companies must build systems that are adaptable to changing demand rather than locking themselves into costs they cannot change. This principle applies to a range of costs, from cloud computing to marketing and sales spending.

“Now is a great time to invest in making your workloads elastic. Overspending on static infrastructure costs, whether on premises or in the cloud, is a bad place to be when you are struggling to predict customer demand. Prioritize optimizing your costs with technologies like serverless and event-driven architecture that enable elastic scale. Learning this skill also helps with future innovation, so your next product has scalable costs from day one.” - Gabe Monroy

When thinking about your marketing spend, ensure you are measuring the ROI of all marketing activities, and be ready to halt those that aren’t giving you a strong return.

“Experimenting with what works best is always key, especially as user behavior may change in economic uncertainty. Make sure all of your channels are optimized and leverage channels like content and retargeting. By providing educational content you can bring in potential customers to your website at a low cost, and then retarget them with cost-effective paid advertising.” - Carly Brantz

Challenging times can spur innovation

Despite the stress that startups may experience during a downturn, learning to optimize costs and build operational efficiencies can be a good exercise for businesses. Companies that can bring their employees together and make it through tough times will be set up for success in the future.

“When companies have a lot of money they may not be as disciplined, and getting scrappy with how you’re approaching marketing is a good exercise. Teams can come together during challenging times, and we often see that companies that persevere through difficult times are the ones that are skyrocketing in future years.”  - Carly Brantz

It’s also critical for startup founders and employees to recognize the cyclical nature of stock markets and economies and see the potential upsides of a refocus. Historically, downturns have been followed by the emergence of new, innovative products and businesses.

“In the 1970s the US experienced a long bear market and flat growth. What came out of that time was companies like Microsoft, Apple, and huge innovation in the fiberoptics industry which led to the birth of the internet we know today. This is the time when people innovate and create.” - Yancey Spruill

If businesses can control their spending, build adaptable systems, and invest in their customers and employees, they can come through a downturn and will often be a stronger company on the other side.

DigitalOcean is the cloud partner for startups

At DigitalOcean, we understand the unique needs and challenges of startups and small-to-midsize businesses. During a downturn, factors like price predictability and efficiency are more important than ever, and DigitalOcean is committed to being the cloud partner startups need during this time. To experience our simple, predictable pricing and developer-friendly cloud computing tools, sign up for an account today. Startups can also benefit from Hatch, DigitalOcean’s global startup program which provides eligible startups with infrastructure credits, prioritized support, and more.