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If you’ve been wondering when is the best time to start your business, but the news headlines are giving you butterflies (and not the good kind), get this.
You can start a business in a cooling economy and still see your startup thrive. You just have to do it right (and smart).
Right now, the economy is in cool-down mode. You may have to adjust your business plan and re-strategize funding, but you still have a big chance to launch a business.
Here’s the scoop on:
- Where the U.S. business landscape is going into Q4 2022
- Why you may need to reevaluate your business funding strategy
- Where to source funding
- What to keep in mind as you start your business in an economic downturn
But First: Are We Really in an Economic Downturn?
(Go straight to funding, if you’d like)
The U.S. economy has cooled a lot over the last year. An ongoing pandemic, Russia’s war on Ukraine, supply chain bottlenecks, soaring energy prices, and more have all had ripple effects.
Just look at inflation, which is up 8.5% in the year ending in July 2022, according to the Consumer Price Index (CPI). Wholesale inflation is even higher at 9.8 percent for the period, according to the Producer Price Index (PPI).
Over in the stock market:
- The S&P 500 index fell 18.53% YTD as of September 6, 2022.
- During the same time period, the Nasdaq Composite fell 27.10%.
- And the Dow Jones Industrial Average is down 14.81%.
While the stock market is not the economy, the two are not mutually exclusive. Stock market movement gives insight into investors’ feelings about the economy (which is why Federal Reserve meeting days tend to cause a bit of a tizzy in the stock market).
What are policymakers doing to combat a cooling economy?
President Biden’s economic initiatives show the federal government is trying to position American businesses to better fare a downturn. We see this with the approval of the Inflation Reduction Act (a spending bill heavily focused on climate change) and CHIPS Act (which aims to boost U.S. semiconductor chip production).
Meanwhile, economists say the Fed is shifting from a soft landing to what’s called a “growth recession.” A growth recession is milder than a full-blown recession, but more substantial than a slowdown.
Why you need to be more strategic with business funding now
Most small businesses don’t rely on venture capital (VC) to fund their fledgling business. Still, the state of VC provides useful metrics that show us how big investors are pivoting in a slowed economy.
Silicon Valley VC firm Y Combinator told founders in a letter in the first half of 2022 to “plan for the worst.”
VC funding fell by $5 billion from March–April 2022 alone.
VC firms are being choosier with investments, but that’s not all. The U.S. is also seeing lower valuations (companies are going through what are called down rounds, where valuations shrink). This is important because, as reporter Trevor Clawson puts it, “A lower-than-expected valuation will mean that you will have to hand over more equity to investors in order to raise the finance you require.”
What does all of this mean for small business owners and everyday entrepreneurs?
You need to go into funding with a clear strategy, keep your options open, and brace for higher borrowing costs (ahem, interest rates) and a more robust downturn (or even…a dreaded recession).
Small business funding sources for a slowed economy
“There is an old saying that it's not what you know but who you know,” says Matt Miller, founder and CEO of Embroker.
For Miller, leveraging your network is key. He adds, “Businesses have a multitude of factors that contribute to their sustainability, but whether its suppliers or additional capital, it's who you know that can provide you the assets to start your business and build its foundation.”
Miller says connections can protect your business when the going gets tough. Some methods for networking include:
- Going to trade shows
- Becoming a part of your local chamber of commerce
- Establishing connections for supply lines, cross promotion, and investors
If your personal savings are dry—and asking your friends, family, and acquaintances for funding isn’t an option—there’s more. Here are four ways to find money to start your business:
- Grants are a solid solution for entrepreneurs who want to avoid debt. Visit Grants.gov to find public grants you’re eligible for. Seek out private grants for more options.
- Crowdfunding works for founders with products or services that appeal to the masses. With an evolving creator economy, crowdfunding platforms like Kickstarter and Patreon could be the stepping stone you need.
- Vendor financing (aka trade credit) lets you borrow credit from vendors, typically for 30–90 days. This is called a Net-30 (or Net-90) payment. Repaying vendor accounts on time helps you build your business credit.
- Merchant cash advances are a type of financing where business owners receive a cash advance based on their credit card sales and ability to repay. Use this only if you’re in a quick cash flow blip, because you have to give a percentage of sales away until you repay your debt.
Things to look out for when launching a startup in a downturn
Be aware of loan terms
If you’re planning on borrowing money, make sure you’re aware of loan terms like interest rates. The Central Bank has been instituting Fed rate hikes and is likely not done yet. This makes the cost of borrowing more expensive, but many loans are still affordable. You just have to keep a keen eye.
Understand your market
Lilian Chen, co-founder and COO of Bar None Games, says starting a business in a cooling economy has one big perk: competitiveness.
That is…there’s less competition in an economic downturn. Still, you should understand your competitors’ market share, your own position in the market, and sector forecasts.
Chen says, “Before you seek out investors for financing, ask friends, professionals, or other business owners to look over your plan and offer feedback. [...] Start small, expanding as sales pick up. Apply this template and you’ll achieve entrepreneurial staying power.”
Add value
As with any business cycle, sell what your audience truly wants or needs. Add value where you can to stay afloat. Shaun Martin, CEO of Denver Home Buyer, “This may mean offering new and innovative products or services, or finding ways to cut costs without compromising quality.”
Make marketing organic
Adelle Archer, co-founder and CEO of memorial diamond company Eterneva, says, “Unlike any other time in history, there are now more opportunities to get your business’s name out into the public sphere with almost no costs.”
You can still invest in marketing. BUT…also take advantage of social media platforms, online communities, and other digital outlets to organically market to hundreds of thousands of people. While the cost of running a business varies for in-person, e-commerce, and others, organic marketing helps you keep a positive cash flow.
Last word on starting a business in a cooling economy
If we’ve learned anything from the pandemic, it’s this: Prepare for disruptions.
As the U.S. economy endures a cooling period, staying diversified and ready to pivot is everything. At the end of the day, seek different types of funding and be cautious with your financials. Because starting a business in a cooling economy the right way can give your biz an unbeatable endurance.
