Key Takeaways
- Recessions reduce competition from overfunded companies that cannot justify their burn.
- The best hiring markets for startups are often during economic contractions.
- Customers who buy during downturns are typically higher-value, more committed customers.
The standard advice to founders during economic contractions is to be careful: extend runway, cut costs, focus on profitability. This advice is not wrong. But it misses a set of advantages that economic downturns specifically create for early-stage companies.
The Competitive Landscape Simplifies
During boom cycles, capital is plentiful and competition is intense. Companies that should not survive on the basis of their unit economics are sustained by easy capital. When the cycle turns, those companies face hard decisions that they often do not navigate well. The result is a competitive landscape that simplifies: the undifferentiated, poorly-managed, and overvalued companies exit the market or contract, leaving more room for companies with genuine product-market fit and sound economics.
Talent Becomes Available
Some of the best hiring Saim Abbasi has done, and has seen portfolio companies do, happened during market contractions. Senior operators who would have been unavailable or unaffordable during a peak market become open to conversations during downturns, particularly operators who have equity situations that are less compelling than they were 18 months earlier. The talent market that is difficult for startups during boom cycles is frequently favorable during contractions.
The Customer Quality Signal
Customers who buy from an early-stage company during an economic downturn are making a deliberate choice in a context where every dollar is scrutinized. Those customers are typically more thoughtful about their decision, more committed to making it work, and more valuable as references than customers acquired during a period when budget approval was easy. The downturn cohort of customers often produces better retention numbers than the boom cohort.
"Companies built in downturns tend to be leaner, more focused, and more customer-driven than those built during boom cycles."