Last week someone asked me what I thought would happen to the startup world when the next recession comes along. I don’t spend any time worrying about recessions, but I also know that they’re a normal part of the business cycle and will eventually happen. Here are a few thoughts on the impact of a recession on the startup world:
- Volume of Startups Increase – With large numbers of layoffs comes more people that become entrepreneurs out of necessity. Most will be replicative entrepreneurs but there will still be plenty of innovative entrepreneurs.
- Valuations Go Down – As public SaaS market multiples go down, so do SaaS valuations. Hot startups will still demand a premium but VCs will be in a stronger position of power as their dollars will be able to buy more equity.
- Hiring Becomes Easier – Suddenly there are great people on the market actively looking and more people that have jobs are open to talking after their own company just laid off employees. Top talent will still be in high demand but things get slightly easier for finding good people.
- Angel Funding Goes Down – As the stock market and real estate decline in value, individuals start feeling the wealth effects of a smaller portfolio, and that translates into fewer angel deals. Family offices will be fine but most angels will cut back.
- More Zombie Startups – Thousands of zombie startups, defined as startups that have enough revenue to stay in business indefinitely but little or no growth, already exist and that number will grow faster when the economy gets tougher.
- Nice-to-Haves Wash Out – Products that are in the path of revenue thrive and the nice-to-haves suffer. Meaning, products that help companies make more money do much better than ones that are more difficult to quantify value.
Pardot was built during a recession and became stronger because of it. Recessions have a real impact on the startup world, but great companies are started in all business cycles.
What else? What are some more thoughts on the impact of a recession on the startup world?