Five Ways Startups Can Manage an Economic Downturn

The global economic slowdown is impacting not only established businesses, but startups across the world. At a time when even leading tech companies such as Meta, Google and Twitter are laying off employees, startups can find it increasingly difficult to weather the economic storm.

In the region, startups are also facing a host of other challenges such as sky high inflation, rising interest rates, and a devaluing currency, as is the case in Egypt. Despite these setbacks, however, investments are still trickling in. Last year, MENA’s startups attracted $3.2 billion in funding, up by 8% from 2021, according to Magnitt’s Emerging Venture Markets report.

Regardless, with liquidity in the market drying up, startups need to know how to navigate an economic recession to ensure that they not only survive, but thrive during uncertain times. Below are five ways startups can manage an economic downturn…

CUT COSTS

Founders can look into cutting unnecessary business expenses such as over the top marketing budgets, underperforming departments, and travel costs amongst other spendings.

Fundok, a travel tech startup headquartered in Dubai, is managing its expenses by being a lean organization. Launched during the height of the COVID-19 pandemic in 2020, the startup learned how to efficiently manage costs to not only stay afloat, but to grow its business. One way it did this is by hiring freelancers and opting for a hybrid work arrangement. But for other startups, knowing where to cut costs can be difficult.

“Everyone is trying to do their best to estimate on how to best cut costs,” Mohamed Nassar, Co-Founder of Fundok, tells StartupScene. “But this is very difficult for most startups, because most of your spend, particularly for early stage startups, is going towards a goal of monetization, and whatever cost you’re going to cut is more than likely going to either slow down rate of growth that you’re aspiring to, or make it more difficult to reach.”

According to Nassar, marketing and overhead costs are usually some of the easiest expenses to cut, depending on a startup’s area of business. He cautions, however, to mind the potential consequences that cuts can have.

“Making sure whatever you do is not done at the expense of actual performance,” he says. “Looking where there is a bit of fat in the processes and start streamlining businesses, and use it as an opportunity to see how you can be more innovative in how you go ahead moving forward.”

EXTEND RUNWAY

With the fundraising climate becoming increasingly challenging, it is crucial for startups to learn how to extend their runway. In a recession, “cash is king,’’ so founders need to make sure they have enough capital to get them through the next period.

Kitchefy, a Jordan-based cloud kitchen startup, is trying to do so by curbing costs and determining how best to allocate funds.

“We’re cautious with our expenses in general,” Abdullah Absi, Co-Founder and CFO of Kitchefy, previously told StartupScene. “At the same time, we ask ourselves, is this money being spent going to bring us value now or later? If the answer is no, there is no need to spend now. If yes, should I spend it now or later? We’re trying to increase our runway within our raises and the money that we have now to extend our runway as much as possible.”

Besides prioritizing spending, the startup is also participating in more bridge rounds. “What we’re doing today, the round we were raising, is not as big as the round we wanted to raise,” says Marwan Abu Sakhna, Co-Founder and CEO of Kitchefy. “It’s going to be smaller, but at the same time, we will raise the next round earlier than we planned to.”

FOCUS ON PROFITABLE REVENUE STREAMS

It goes without saying that startups must also focus on generating revenue, particularly during an economic downturn. One way they can do that is by knowing their best customers, and their best selling products and services.

Elmenus, a food delivery platform in Egypt, managed to achieve double digit growth and reduce burn rate by three times in the last six months. “We were coming from a historically negative growth margin, so we were able to flip to profitability in a short amount of time,” says Amir Allam, CEO and Founder of Elmenus.

Using data analytics, Allam was able to determine the startup’s best users, and allocate spending accordingly. He also adapted the business to have its own fleet, which proved to be profitable while also enhancing customer experience.

“What we did well was focus on our best users, focus on the things driving more profit, and we used a lot of data analytics and a lot of the tools we have built throughout the years to be more mindful with our spending on the right channels,” he explains.

EMBRACE SUSTAINABLE GROWTH

These days, the term ‘sustainable growth’ is making waves in the startup world, potentially signifying an end to the ‘growth at all costs’ era, at least for the time being.

But sustainable growth should also emphasize a healthy unit economics. According to Ayman Ismail, Founding Director at AUC Venture Lab, growth can no longer come at the cost of bad unit economics.

“As long as you have a good unit economics then your investments are viable,” he says. “It’s not a matter of, ‘Am I growing at any cost?’ If you have a bad unit economics and are growing, that’s still not good. Growth should be backed by a proper unit economics and a proper business, even if you’re going to see returns in a few years.”

For Allam, who’s currently raising funding, he also notes that investors today are looking to invest in startups that have a healthy business foundation, which generally includes good unit economics, high retention rates, and significant growth opportunities.

“Investors are wary about companies that burn a lot of money each month, and that don’t have a clear path to profitability,” says Allam. “Everyone is speaking about ‘clear path to profitability’ and if your business doesn’t have that, then it’s problematic.”

CONSIDER FUNDING ALTERNATIVES

Although VCs may be the most common type of equity funding for startups, there are other financing alternatives for founders to consider.

Venture debt has lately been emerging as an alternative to VC funding, particularly as startups continue to struggle with raising capital. Egypt attracted a total of $88 million in debt funding from 2018 to 2022, ranking third in the MENA region, according to a recent report by Magnitt.

Among the most recent Egyptian startups opting for this type of funding was KarmSolar, securing $3 million in debt financing earlier last month.

Besides debt financing, startups can also consider approaching incubators. “I think that these sorts of entities are amazing because not only do they give you some limited funds for you to grow, but they plug you into an ecosystem of experts and likeminded startups,” says Nassar from Fundok. “Great avenue for any startup to seek funding, because it is money with very little strings attached.”

While there is no one path to surviving a global downturn, it is worth remembering that recessions are part of an economic cycle. “Business cycles come and go,” says Nassar. “Entrepreneurs need to always be optimistic, and not lose sight of long-term goals for short term volatility.”