"Oasis of Innovation": How Startup Companies Can Thrive During Economic Turbulence


Recession is a dreaded word for companies, workers, and investors alike.

There are valid concerns that an economic downturn may stifle growth and returns across many organizations and industries.

However, a recession does not mean that opportunities in the private markets completely dry up.

In fact, conditions of a recession can create an "oasis of innovation" that leads to incredible startup companies rather than a desert of stifled growth.

One study found that "almost half of the Fortune 500 companies were originally founded during periods of economic stress."

In recent memory, some of the biggest tech unicorns such as AirBnB, Slack, Square, and Uber all were founded during the Great Recession between 2007 and 2009.

Investors looking to maximize returns during economic turbulence must learn how to target startups that thrive in this "oasis of innovation".

Factors that lead to innovation

We've written in the past how the principle of creative destruction allows certain startup companies to actually flourish during periods of economic downturn.

One major takeaway is that startup companies are flexible enough to innovate into new markets and rapidly adapt to changing business conditions.

In current market conditions, there are a few ongoing trends that may accelerate the path of innovation for new companies.

Lack of Workplace Security

Recent layoffs in the tech sector could lead to a push for many talented individuals to pursue new ventures.

The wave of layoffs appears to be continuing into Q1 2023 that many speculate are signaling an economic downturn.

So far, these cutbacks to the workforce have disproportionately affected the tech industry.

Industry giants such as Google and Amazon alongside a multitude of smaller startups are letting top talent go.

This means that terminated employees may turn to entrepreneurial pursuits. This is especially true for experienced workers who have temporary cushions in the forms of large severance package or for high-earners who built up savings over many years.

Other talented workers who weren't necessarily laid-off are also reconsidering traditional employment, especially at large companies where they may feel loyalty no longer is rewarded to the same extent.

Rather than applying for or accepting new positions, these two categories of employees may start creating their own ventures that could form the next tech unicorn.

Budget Tightening

Layoffs are only one symptom of the larger trend of existing companies feeling the effects of tighter budgets.

Organizations both small and large alike are shedding future expenses in anticipation of lower revenue in 2023.

One recent survey concluded that conserving cash and stabilizing their business is the primary focus for CEOs at high-growth companies this year.

This same study revealed that only 1 in 5 CEOs were looking “invest aggressively to gain market share” or “invest aggressively in product" to grow their businesses.

While these businesses focus on their core business, opportunities for innovation open up to new entrants.

The costs of starting a software or technology remain extremely low for startups that come up with the next great idea or even deliver value in a niche industry.

The birth of LinkedIn following the dot-com crash of the early 2000s or Uber transforming the private transportation industry in the late 2000s are evidence that a startup can be successful even when capital is tight.

All it takes for the next unicorn is for one company to "zig" while others "zag".

Emphasis on ROI vs. Growth

As rates raise, the cost to borrow money is now higher. In practical terms, this means that business growth and expansion simply becomes more expensive for many organizations.

Businesses are starting to consider the total return on investment from capital, rather than simply pursue rapid growth to gain a competitive advantage.

For startups, this means that capital will be deployed with a more conscious approach, rather than growth simply to gain market share over competitors.

For established businesses, they may allocate capital towards projects with proven revenue generators rather than more risky ventures.

However, ignoring innovation can doom a business that doesn't know how or when to adapt to new conditions.

Like the famous case of Blockbuster turning down Netflix, focusing on what worked in the past for generating revenue is no guarantee of future results.

Identifying Smart Investments During a Recession

It's easier said than done to create a unicorn startup during a recession.

Equally difficult from an investor's perspective is figuring out which new ventures will hit big in the future.

One of the most challenging tasks for investors in the general public is gaining access to the "behind the scenes" as startup companies are being built.

Venture funds with a history of success such as a16z and Founders Fund have prospered by being in the know.

Like these funds, the team of analysts at Venley Capital can help you be in the know of finding the next startup flourishing in the oasis of a looming recession.