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3 Tech Startups Enduring Economic Setbacks

During the power struggles that determine formal names, it is inevitable that economic headwinds are on the horizon. 

As is always the case in the real world, not everyone will be affected by this. Numerous enterprises prosper amid economic downturns. 

Some of these are evident, such as businesses in the industries of the industrial supply chain, utilities, and bargain retailers.

  • However, technology is generally absent from this list. However, this is only sometimes the case. 
  • Technology brands are more delicate and susceptible to tumbling during difficult times. Specific fields, such as AI, can grow during a recession.
  • Even IT firms, the essence of vulnerability in a recession, can position themselves to succeed. Here are some instances of businesses that are doing so in a variety of ways.

1. Gabb Wireless

It is a purposeful startup. The company manufactures smartphones aimed at younger consumers. 

These gadgets provide essential features such as voice communication, text messaging, and music playback. 

However, they do not provide access to games, social media, or the internet. It is a business that will prosper in the present for various reasons. 

First, the possibility of a recession is looming amid one of the company’s most profitable times: the back-to-school season.

Parents wish to continue healthy and secure communication as children return to school. 

  • This is frequently done regardless of cost or economic situation, which brings us to the second crucial factor in Gabb’s continued success: the company’s objective.
  • Numerous tech firms concentrate on somewhat simple ideas that, in theory, provide some advantage. 
  • However, their services and products need to be improved when put to the test.
  • In Gabb Wireless, the benefits are apparent, ethical, and trump financial considerations. 
  • This places the startup in an excellent position for future success, even if the economy experiences a temporary downturn in the coming months.

2. UiPath

This is a robotic process automation firm established in Romania. 

UiPath’s software facilitates large-scale end-to-end automation, enabling firms to automate activities across their whole office. This is a business that capitalizes on financing at the optimal time. 

As the pandemic was wreaking havoc on the market in June of 2020, UiPath was able to get a $225 MM round of funding following successive funding rounds that began in 2017. 

  • Less than a year later, in February 2021, the company obtained another $750 MM fundraising round during the pandemic.
  • UiPath went public recently and is rapidly departing the startup phase. 
  • Nonetheless, it continues to be a formidable technology business gaining pace at the ideal time to defy the odds.

3. Uber

This last item is no longer technically a tech startup. But it still operates like one. It has operated as a startup since its founding more than a decade ago. 

It has continuously earned razor-thin margins and worked at a loss. However, the company’s primary mission and strategy have kept it afloat. 

And, of course, a significant portion of this plan has centered on the ambition to power the company’s fleet of vehicles with self-driving cars — a goal that is rapidly becoming a reality.

  • While Uber’s most fantastic days are undoubtedly still to come, the likelihood of a recession in the present moment could once again raise concerns about the company’s fragility. 
  • In the same month that a recession became a distinct possibility, Uber achieved positive cash flow for the first time.
  • The ridesharing giant is still operating as a startup. 
  • Nonetheless, it is gaining considerable pace and turning a corner in time to help it weather any potential economic turbulence.
  • Similar to other businesses, the technology sector faces economic uncertainty. 
  • The financial landscape is shifting as the Federal Reserve raises interest rates and investors become warriors of where they spend their money. 

Joe Brusuelas, a chief economist at RSM US LLP, predicted at the end of October that there was a 65 percent chance of a recession over the following 12 months.

Even though tech companies may need to reduce spending and control headcounts, they are uniquely positioned to weather any possible economic shocks. 

Individuals and businesses will likely need technological tools, especially as businesses in other industries seek to streamline their processes and use more automation. 

Below, we analyze some significant areas in which IT companies are thriving and how they might continue to do so as the year ends.

3 Reasons Tech Is Poised For Economic Headwinds

1. Strong Access to Capital and Talent

Although investors may be increasingly wary of the economy, some developments brought about by the pandemic continue to be advantageous for software startups seeking finance.

Due to the proliferation of remote activities, investors and capital have become geographically dispersed. 

Some investors in the United States have relocated their headquarters and opened additional offices in secondary and tertiary markets. 

Silicon Valley continues to be the epicenter for venture capital businesses. 

With the proliferation of remote meetings over the past two years, however, it is optional for startups and later-stage technology businesses seeking venture investment to be located there to secure their first or subsequent round of funding.

Similarly, access to talent has expanded significantly. As a result of the increased demand for remote work choices, technology companies can scour more markets to fill open positions. 

And this extends far beyond minor U.S. communities; it is more straightforward than ever for corporations to recruit talent elsewhere.

The statistics also support this optimism. October represented the 22nd consecutive month of tech sector employment growth, according to CompTIA’s October tech jobs report. 

Looking back one year to September 2021, IT employment has increased by 22 percent annually. 

  • CompTIA reports that job posts have declined more recently, with September postings down 12 percent compared to August.
  • These factors typically favor technology companies, but those who wish to take advantage of this environment must keep abreast of the commercial consequences of a distributed workforce. 

As we noted in a recent article, the following factors must be considered:

  • Regulatory and employment laws in numerous nations
  • Global standards for data protection and cybersecurity
  • Managing regional cultural cohesiveness
  • Despite the worsening economic outlook, technology companies should be prepared to scale their workforces as necessary.

2. Providing Other Industries with Essential Infrastructure

The rise of remote work is also advantageous for IT companies in another way; the technology solutions that so many of these companies have developed and released are the very instruments that have allowed other industries to adapt their operations during the pandemic.

In the following six months and into next year’s fourth quarter, many businesses may seek new ways to leverage automation to streamline their operations, technology to strengthen their sales funnels, and tools to enhance the security and privacy required by modern organizations. 

  • These critical areas could lead to new opportunities for software companies willing to expand beyond their current customer base.
  • Here are two critical questions that leadership teams may pose to identify their next steps:
  • Do we have the correct proportion of customer success team members and engineers to develop new products and sales to support our company’s continued expansion? 
  • In the coming year, it will be more necessary to pay close attention to net retention rates and customer turnover.
  • Are we looking for top talent in the appropriate domestic and international locations?

3. Adaptable Business Models

Young technology companies creating for the future may need to fine-tune their growth strategies in light of impending recession fears. 

This may involve a tighter correlation between revenue growth and cash burn, a renewed emphasis on customer and client retention to maximize customer lifetime value, and the establishment of scalable business operations in a hybrid or remote-first environment.

  • The emergence of subscription-based business models in recent years may provide one strategy for teams seeking to adapt and increase client retention. 
  • Someone said in 2021 that these approaches “may enable stronger client ties, greater pricing flexibility, and the possibility to construct an annuity-based business model.” 
  • Consumers will likely continue tightening their purse strings in the following months, making more robust relationships and greater flexibility crucial.
  • As mentioned in the RSM article from the previous year, organizations adopting or planning to implement a subscription-based model should consider the following.

Conquering the Obstacles of a Recession

During a recession, tech companies are frequently among the first to struggle. 

Clients on a tight budget tend to place less value on products and services that deliver tremendous benefits.

This may be a popular belief, but it need not be an assumption.

Numerous technology companies are positioned to endure difficult times. Some rely on the necessity of their products, as with smartphones for children or AI advancements. 

Others can save substantial money by assisting them in enduring temporary economic hardships. 

  • Still, others can gain sufficient momentum to depart the initial period and the requirement for continuous cash infusions before the onset of difficult times.
  • As a tech startup, there are many formulas for overcoming economic difficulty. Maintaining a flexible attitude and a willingness to adjust to one’s surroundings is crucial.
  • Recessions are challenging but temporary. If a company can survive the short term, it can position itself for long-term success, even as a technological startup.

Why Startups Are Becoming Anxious

Even though many companies in the emerging industries sector have experienced growth, the uncertain economy has made it challenging to develop and acquire capital. 

During a recession, speculative growth stocks typically suffer the most in market growth. For example, psychedelic stocks have fallen over the past six months. 

The market’s significant participants have decreased their shares by nearly 60 percent. 

While there is considerable interest in the market due to the immense promise of psychedelics as a treatment for mental illness, investors have become cautious, often investing only a small portion of their wealth.

The cannabis sector has been struggling in both the United States and Canada. 

While investors rushed to fund the numerous cannabis companies that flooded the market after Canada and multiple U.S. states legalized medical or recreational cannabis, entrepreneurs struggled to compete with black market businesses, which did not have to deal with regulations, taxes, or issues with growing high-quality plants on a large scale. 

  • The fact that many of these new companies’ original valuations turned out to be overstated could have helped matters.
  • While there is potential in the cannabis industry, especially as more states move toward legalization, recent data are problematic, and venture capital investment in this sector has declined. 
  • According to reports, only 41 firms received venture capital funding this year, and they were only able to raise $294 million, which is less than a third of the amount of money Cannabis companies made in the first half of last year. 
  • With this data, 2019 could be the worst year for financing since 2017. 
  • Similar to the psychedelics industry, cannabis stock has taken a significant hit. Companies still in business are beginning to slash costs and lay off employees to remain competitive.
  • This is the case for many entrepreneurs in growing areas, including esports and renewable technology enterprises. 
  • Even without the unique problems found in the cannabis sector, new industry startups share specific characteristics: many are not yet profitable, and we’ve entered an era of cautious investors who will be wary of where they invest their money. This may result in reduced valuations and venture capital funding.

How to prosper and survive in a challenging economy

Although entrepreneurs are currently facing enormous obstacles, all is not lost. Now is the time to return to the foundations of operating a business in a new industry and assess your company’s processes and structure. 

  • It is crucial to meet with your financial team to determine what is working and where adjustments must be made. 
  • A skilled and devoted financial services organization like Zeifmans can help you succeed.

Business compliance and planning:

This is essential to any recovery plan, as it enables firms to comprehend long-term potential and maintain compliance with changing tax rules and regulations, which is particularly vital in the growing industries sector. 

Your financial staff can discover growth opportunities and ensure that compliance standards are up to date. 

In addition, they may assess if your company structures are still advantageous in the present environmental scenario.

Examining your overall business model is another brilliant option. Your original business plan would have considered the market conditions at the time. 

  • Ensure that your plan accounts for a potential recession and that you are aware of any necessary adjustments. 
  • Include gross margins, net margins, channels and markets, sales, inflation rates, and client base in your analysis.
  • When examining your plan, make carefully consider the following:
  • Increased transportation and material costs
  • rising energy expenses

Understanding financial alternatives

Innovation and expansion are crucial to recovery attempts, even in a troubled market. If your company’s present revenue streams decline, finding new sources of income will help protect it. 

This will undoubtedly necessitate continuing investor and loan capital. Investors in the rising industry sector will seek out organizations with a steady cash flow and sufficient money for the foreseeable future.

Banks and other financial institutions will require a comprehensive business plan considering the present economic context.

  • Review your assets to identify non-essential components that can be converted into cash, such as land held for expansion, old equipment, or unused patents or trademarks, to obtain quick liquidity. 
  • Consider sale/leaseback possibilities as well.
  • For faster funding, it is vital to understand what banks seek and be prepared for the application process. 
  • Lenders will want entrepreneurs to demonstrate an understanding of the financial measures used by banks. 
  • Our Zeifmans advisers can respond to frequent questions from lenders, such as burn rate, earnings sustainability, inventory turns, and monthly cash flow projections.
  • Your advisors can also assist you in maximizing tax credits and government funding schemes, such as SR&ED, which offers research and development operations support.

Financial fundamentals: what you need to know about cash flow

Understanding how to manage cash flow is critical to reaching profitability, as running out of money is the quickest way to destroy a firm. 

It also aids in attracting investors, who examine cash flow more closely than in the past, mainly when dealing with startups in developing industries.

Updating your cash flow projection using historical financial data and current financial developments is essential. 

A substantial amount of skepticism regarding the future is critical. If cash flow is significantly constrained, it is prudent to reassess your prediction daily or weekly. 

Additionally beneficial are longer-term assessments, which are often conducted monthly.

During these reviews, you should examine your cash burn, review non-essential/discretionary spending, consolidate checkbook control, and limit the number of authorities with spending authority. 

  • In addition, it looks at labor costs, the potential for layoffs, and work-sharing schemes. 
  • In addition, you can investigate supplier/customer adjustments to payment conditions and previously untapped government initiatives.
  • Each service or product should be evaluated to determine its profitability and desirability. 
  • If you observe that certain services or products are more popular than others, it may be time to prioritize those and eliminate those that do not generate a profit. 
  • High-growth divisions or product lines are usually ravenous consumers of cash. Consider imposing temporary growth restrictions.
  • Managing your supply chain effectively is critical to cash flow management.
  • In addition, now is the time to assess your investment terms and loan interest rates. The debt with the highest interest rate should be repaid first.
  • Instead of using current money, finance significant acquisitions and long-term assets to boost cash flow. 
  • To avoid being unprepared during a financial crisis, it is essential to plan for future funding demands effectively.
  • In addition, you should ensure that your financial reporting is up-to-date so that it can be provided to funders upon request and that you meet all reporting standards. 
  • You want to take advantage of a chance to seek cash because you’re figures or audit still need to be completed.

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