How to navigate your business through the economic downturn

How to navigate your business through the economic downturn

Despite high inflation and rising interest rates, it’s not all doom and gloom. Here, 5 tech leaders share their advice.

The predictions are a little, well, dire.

Earlier this summer the Bank of England warned that the “global economic outlook has deteriorated markedly.” TD Securities put the odds of the U.S. entering a recession in 2023 at more than 50 percent. And with higher interest rates and inflation, tech leaders have a lot to deal with.

This economic uncertainty is already making waves in tech: In recent months, 95 North American tech companies — including Tesla, Netflix, PayPal, Twitter, Hootsuite and Wealthsimple — have together laid off thousands of workers, while others have instituted hiring freezes. But, according to some Canadian business leaders, it isn’t all doom and gloom. Here, five experts share their perspectives on how entrepreneurs should navigate the economic downturn.

Protect your workforce

MaRS executive-in-residence Daneal Charney advises ventures on how to attract and retain employees. She says startups shouldn’t be too quick to lay off staff:

“The companies we advise seem to fall into three camps: optimizing their business and making smarter decisions to avoid layoffs; moving to layoffs quickly; and watching what others do. That third option is the most dangerous move. It signals to employees that you don’t believe in your business or in them. But layoffs can also backfire. According to a 2022 SaaS People Benchmark study conducted by MaRS, there are three major downsides to letting go of employees: knowledge is lost, speed and product quality suffers and morale plummets.

“We should think of layoffs as a snowball rolling downhill with unintended consequences and longer-term effects. Because of the tight social networks inherent in scaling tech companies, they not only eliminate the employees you intend to exit, they also push employees you don’t intend to exit out the door. This is because colleagues and connections are a key retention lever. Now is the time to invest more in employees with an outsized impact, actively manage those in the middle and exit under-performers gracefully.

“Trust is a valuable, intangible asset that is hard to win back. Employees watch for signals from leadership that confirm whether they have chosen the right company to work for or not. So, don’t take your foot off the gas on investment in people. Not doing something or delaying it gives employees the signal that you have given up or they don’t matter.”

Look for liquidity

As the executive director of tech incubator the DMZ and the CEO of DMZ Ventures, Abdullah Snobar has worked with hundreds of entrepreneurs through all kinds of economic conditions. He sees opportunity in downturns — if businesses can free up assets:

“I wouldn’t want to sound the alarm that people should stop or reconsider starting a company. I’m actually the opposite on this one — I’m still pretty bullish. But cash is king; it’s not a bad time as long as you have some liquidity. What that means is a lot of companies are examining budgets and identifying their nice-to-haves versus their must-haves. They’re making decisions to free up dollars so they’ll have runway for the next 12 to 24 months.

“On the sales side, business-to-business companies are locking in longer-term commitments to build some assurances — looking for three or four years of commitment instead of one year at a time. Founders also need to look at creative ways to bring in capital, like bootstrapping and bank loans. If I had to give startup founders one piece of advice, it would be to remain receptive to the opportunity an economic downturn can bring. It’s actually a good time to build a business. Remember, WhatsApp and Uber were both built during recessions.”

Don’t be overconfident

Craig Leonard is the managing director and general partner at Graphite Ventures, which provides seed-stage financing for startups. He’s seen economic downturns come and go, which is why he advises founders to do their homework and plan ahead:

“We actually do well in economic downturns because we’re so disciplined in our pricing, our valuations and in the way we conduct diligence and spend time with businesses prior to investing in them. Even with companies we have invested in, during times like this, we take a look at management, we look at what they’re facing and what that might do to their customers, revenue, employees. Generally speaking, we find the best founders are out in front of it. They’re the ones who have conviction in what they’re doing against all odds, but they are also humble enough to take a step back and reel things in when necessary.

“Over-optimism can be a downfall. Founders kind of have to be delusional in one way or another, just to get up and do what they do every day, right? But if you’re not going to pay attention to signals that an economic downturn is coming, if you’re not going to reel things in, if you assume nothing can happen to your customers or your revenue, that puts you in a really dangerous situation.”

Look for opportunities

Pierce Ujjainwalla, cofounder and CEO of software venture Knak is preparing for any situation so that his company can continue to grow:

“We did our plan at the end of 2021 and in that market, it was really about growth at all costs and full pedal to the metal. And then, obviously, the market changed a lot. We’re trying to be very realistic about what could happen and are planning for the worst-case scenario. Hopefully, we’ll be able to readjust as the real market data comes in.

“I’d recommend any founder think about the macro conditions, the valuations, the availability of capital and their capital requirements and plan accordingly. We’re actually continuing to hire for the growth that we’re seeing in America, though we’re being more deliberate about our hires and where we’re spending. It’s unfortunate seeing some of the layoffs that are happening right now, but from an employer perspective, I feel this can actually be an opportunity for companies as lots of great talent becomes available.”

If the numbers are strong and steady, don’t panic

Kumanan Wilson is the founder of CanImmunize, an Ottawa-based startup that develops software to help governments, businesses and individuals keep track of vaccinations. Given the steady demand for his company’s product, Wilson isn’t planning any major changes to his business plan:

“We haven’t changed our strategic plan at all based on the business factors that are going on. We’ve always been very frugal on the finance side. We didn’t even have a line of credit until recently, so we couldn’t take major gambles.

“Even though CanImmunize grew rapidly in 2021 — we went from five people to about 50 — we haven’t had any investment or debt. And I think that helped us when the tech market started to contract. In fact, we expect continued growth, and we’re preparing to support a bivalent COVID vaccine and new mRNA vaccines. The demand is inevitable for what we’re producing, so we are just continuing ahead with our scientific vision. And, because we haven’t taken any investment, we don’t have to make short-term decisions. We can continue on our path.”

On average, MaRS-supported ventures generate more revenue and create more jobs than the rest of the economy. We call this the “unfair MaRS advantage” — see how we make it happen.