Attention founders. It’s not over yet.
For entrepreneurs who led startups during the Great Recession (2008-10), talk of a global recession will seem like an echo from the past.
For new founders, this economic slowdown, combined with a downward trend in funding, represents unchartered territory.
Do you think you can lead in tough times?
Startups face difficult times
Since 2010, investors have raised funds faster than they could deploy them. Startups experienced an unprecedented period of growth.
In 2021 alone — a record-breaking year that beat previous record-breaking years — $630 billion was raised and deployed by Venture Capital (VC) firms into startups.
In every quarter of 2021, over 150 startups with valuations exceeding $1 billion were created. That’s quadruple the rate of Unicorn births in 2020!
But the golden days of excessive funding and wildly optimistic valuations are over.
As market and economic conditions worsened during 2022, venture and growth investors in private companies scaled back their investment pace.
Valuations became more realistic. Term sheets were rescinded. Offers of funding were pulled at the last minute, or founders waited for funds that never materialized.
Back in May 2022, the world’s leading startup accelerator, Y Combinator, advised its portfolio founders to “plan for the worst.” Their letter also warned that “it’s your responsibility to ensure your company will survive if you cannot raise money for the next 24 months.”
Figures from 2022 reflect this slower funding climate. Global venture funding in 2022 reached $445 billion — a 35% decline year over year.
In the final quarter of 2022, investments in North American startups fell 63% compared to the same period a year earlier, per Crunchbase data.
The stock market fall, mass tech layoffs, and crypto’s nosedive all contributed to a loss of confidence in the public and private investment markets.
Capital became more expensive, and conserving cash became a priority.
Is a recession ahead?
The economic environment has changed in the last year, but leading economists and major banks cannot reach an agreement on the likelihood of a recession.
In a recent report, Morgan Stanley economists wrote:
“Our recession probability models have moved to uncomfortably high levels.”
“Tighter financial conditions and market volatility suggest recession in the next 12 months is a coin toss.”
Consensus puts the probability of a US recession in the next 12 months at a hefty 65%, while Goldman Sachs sees it at just 35%.
Last November, Goldman Sachs’ economists published their Macro Outlook for 2023 (PDF) that stated:
“The US should narrowly avoid recession as core PCE inflation slows from 5% now to 3% in late 2023…”
But their CEO, David Solomon, disagrees. Speaking at The Wall Street Journal’s CEO Council Summit, Solomon said there is “a very, very reasonable possibility that we could have a recession of some kind.”
In short, the outlook for 2023 is a guessing game.
According to predictions from industry experts, this downward trend will continue for at least the next 2-3 years.
The World Bank slashed its 2023 growth forecasts to levels teetering on the brink of recession for many countries. The lender said it expected global GDP growth of 1.7% in 2023 and 2.7% in 2024 — down from 3% in June 2022.
This is the slowest rate of growth (outside the 2009 and 2020 recessions) since 1993.
It’s not all doom and gloom
Sure, investment funding is tight. That’s because many investors didn’t deploy much (if any) capital in the last quarter of 2022.
The good news is that there will be more cash about to invest in the first half of 2023.
But, competition for those funds will be fierce due to the large number of startups that delayed fundraising in mid-late 2022.
One of the key challenges founders will have to face is a considerable hit to valuations. Investors will continue to take advantage of the market conditions to offer less funding in exchange for larger chunks of equity.
Founders unwilling to see their stake excessively diluted must accept that they’re unlikely to raise money over the next 2-3 years.
If you have enough runway to make it past break-even to sustainable profitability, then go for it. Once you’re profitable and sustainable, then you may not need additional funding.
Entrepreneurs hate quitting.
If you can’t (or won’t) quit, you need to exercise a few special powers to get your team through the tough times ahead.
Founder tips: Be a leader your team and peers admire
Founders frequently internalize their difficulties.
But when those difficulties become too challenging to manage alone, it’s time to learn and practice a different communication skill set.
1. Communicate transparently
Transparent communication about any problem is an essential skill during tough times.
Liz Fosslien and Mollie West Duffy are authors and communications professionals in high-growth startups. In 2019, the duo published a Wall Street Journal bestseller, No Hard Feelings, and, in 2022, a second book, Big Feelings: How to Be Okay When Things Are Not Okay.
In their latest book, Fosslien says: “Managers have had to shift their own style, handle tricky communications about return-to-office policies, and navigate cycles of hiring sprees and rounds of layoffs, all while keeping an eye out for company culture, checking in on how the team is holding up — and just personally trying to hang in there. After all, many managers are struggling with emotional and situational challenges themselves.”
Fosslien provides a strong reason for leaders to open up more: “It’s the pretending like everything is fine that’s going to destabilize your team; people are much better at reading us than we think they are.”
Try these methods to improve your communication:
- Acknowledge recent events (whether local or international) that could affect people in your company
- Acknowledge and openly discuss any difficulties the company faces
- Bring people together to confront these challenges as a team
- Provide leadership through words and actions that reassure your team
- Handle any redundancies sensitively; provide team members with severance packages and help them find new roles
2. Watch out for burnout
Melissa Steginus, the author of Self Care at Work and Everyday Mindfulness, says that burnout is: “the result of too much energy output and not enough energy self-invested. In other words, it’s burning too much fuel than you’ve put in your tank.”
In 2019, the World Health Organization (WHO) officially recognized burnout as an “occupational phenomenon” that everyone in the knowledge economy needs to manage.
We all need to watch out for burnout when running a business, and founders should pay attention to the following warning signs:
- Feeling tired and drained most of the time (especially if you or a colleague previously had an abundance of energy)
- A feeling of being helpless, hopeless, trapped, or defeated
- Feeling cynical and behaving or communicating negatively
- Experiencing heightened periods of self-doubt
- A general feeling of overwhelm
- An increase in the number of sick days
- Taking more time to accomplish tasks (procrastination is a sign of burnout)
- A lack of enthusiasm for work
- Feeling detached and alone at work (and outside of work)
Tackling burnout is a serious challenge for startup leaders. There’s no one-size-fits-all solution.
3. Look after your mental health
In 2015, Dr. Michael Freeman, a University of California Professor of Psychiatry, published a widely cited and respected paper on the topic of entrepreneurial mental health: “Are Entrepreneurs Touched with Fire?”
The study found that: “Self-reported mental health concerns were present across 72% of the entrepreneurs in this sample,” double the self-reporting average of the general population.
Entrepreneurs are also significantly more likely to have depression (30%), ADHD (29%), substance use and abuse (12%), or a bipolar diagnosis (11%) compared to the average population.
Subsequent studies have confirmed Freeman’s research.
As Dr. Freeman points out, “Mental health is as essential for knowledge work in the 21st century as physical health was for physical labor in the past. Creativity, ingenuity, insight, brilliance, planning, analysis, and other executive functions are often the cognitive cornerstones of breakthrough value creation by entrepreneurs.”
We previously discussed the pressures of running a startup and how founders can effectively manage their mental health, but here’s a summary of the main points:
- Get enough sleep
- Exercise for at least 45 minutes daily
- Maintain friendships outside of startup circles
- Spend time and stay in contact with family
- Eat healthy food (avoid the junk food trap)
- Ask for help
- Make time for yourself
- Work with a therapist, counselor, or lifestyle coach
- Practice mindfulness
- Don’t try to do everything: delegate
- Learn when to say “no”
- Keep your plans and goals flexible
4. Implement company-wide mental health initiatives
Don’t neglect the mental health of your team. Don’t assume everyone is okay because people are still performing and revenue is increasing.
As a founder, you should proactively implement mental health initiatives, such as:
- Subscribing to mental health apps and encouraging everyone on the team to use them (e.g., Calm, Headspace)
- Encouraging the practice of mindfulness. Apps like Headspace can make this easier (a Harvard Medical School study found that mindfulness creates numerous mental and physical benefits)
- Supporting other activities, such as meditation, yoga, and pay for on-demand therapy or coaching for any team member who wants it
5. Practice selective vulnerability
During difficult times, you can benefit from practicing ‘selective vulnerability’ with your team.
In an interview, Fosslien said founders “have to be more intentional about the emotions they express at work and about when to be transparent.”
“Every time they are vulnerable, their reports are watching and analyzing their words and actions for a deeper meaning,” she says. “I’d encourage managers to practice ‘selective vulnerability,’ which is opening up to their teams while still prioritizing boundaries and stability.”
“A simple formula is to pair a moment of vulnerability with a path forward. Something like, ‘I know this is a really hard time for all of us, I’m feeling it, too. My door is always open. Here are the steps I’m planning to take this month to ensure we’re balancing our well-being with making progress, and here’s what I need from you.’ You show you’re human but also that you’re still capable of confidently leading the team through a difficult period.”
Practicing this means:
- Being open and vulnerable, transparent, and as honest as possible
- Show that you have a plan to lead the company forward
6. Don’t assume top performers are doing okay
Pay careful attention to your top performers.
Most startups try hard to hire A-Players in every team: leadership, sales, marketing, product, and customer success. You know who they are. A-Players are full of energy. They positively impact the company and your customers by providing solutions to problems.
Top performers manage and coach their colleagues to the benefit of all. You can’t afford to lose these people.
“You might think that newer hires or people who are visibly struggling are the only employees who require your attention, but your top performers might need additional support, too,” Fosslien said.
Additional support could come in the form of extra time off, coaching, therapy, or even financial or other incentives to show them that their hard work is appreciated and valued.
7. Set boundaries, and consider the emotional context of messaging
As a leader, you set the company culture, and your actions impact the work-life balance of your team.
If you respond to messages and take action 24/7, your team members will feel obliged to do the same. It will become an expectation; the norm.
In the long term, this is unhealthy.
Learn to take time off.
Set clear boundaries.
Aim to ensure you — and everyone in the company — are offline outside of normal working hours. No one can perform at 100% every day if they’re constantly working and thinking about work.
Hustle culture only serves for short periods; when you have no choice. It’s not a healthy or productive way to run a sustainable business.
You also need to consider the emotional context of messages before sending them. Don’t simply fire off a “can we have a call tomorrow?” email. Stop and think.
Humans naturally imagine worst-case scenarios. Add some context. It takes a few minutes more, but saves the recipient hours of stress and worry.
8. Lead with hope, not fear
What’s the one thing stronger than fear?
Lead with hope.
When facing impossible odds, you must inspire, set a clear direction, and encourage everyone to buy into your vision for the future. As a leader, you want the whole team to get behind this vision and drive it forward.
Lead with hope, and be a leader your team and peers want to follow:
- Be optimistic
- Be present
- Be vulnerable (practice selective vulnerability)
- Have a plan
- Encourage, support, and provide coaching, training, and on-demand therapy
- Don’t aim for perfection every time (remember, “done is better than perfect”)
- Keep moving forward; never settle, but don’t forget to celebrate the wins as a team
- Embrace failure, learn, and move on
- Accept and embrace change (mindfulness will help you with this)
- Ensure the whole team shares your vision of the future
- Always do what you say (never over-promise or underdeliver)
- Be consistent
Startup founders face tough times ahead.
If you’ve achieved profitability, keep going.
If you haven’t, keep moving forward until you’re profitable and reach a sustainable cashflow. Put money aside, and keep banking it until you accrue solid cash reserves.
As a leader, you can take several actions to support yourself and the team during the difficult times ahead.
Here’s what we recommend — based on extensive research and numerous studies:
- Communicate transparently
- Watch out for burnout
- Look after your mental health
- Implement company-wide mental health initiatives
- Practice selective vulnerability
- Don’t assume top performers are doing okay
- Set boundaries, and consider the emotional context of messages
- Lead with hope, not fear