Whatever your definition of recession, there's no denying that tough times are ahead.
Costs are skyrocketing.
Capital is scarce.
Companies that looked untouchable are cutting head counts, SaaS tools, and any costs they can't justify during times of uncertainty.
For some founders and leaders, this is uncharted territory. Because for over a decade, we’ve only seen markets increase and outsized valuations.
But now, in place of the "growth at any cost" investor mentality, we're seeing market pragmatism descend like gravity.
You might not know what to expect or how to react.
Having experienced two recessions, I can tell you what the signs mean for startups (the canaries in the coal mine) and established firms (which run out of breathing room next).
I'll tell you not only how to survive but how to win as money gets tighter. Because even in tough economies, there are unique opportunities for serious leaders.
If you're a startup founder, you'll find that venture capital and private equity are scarce. Your next funding round may not be months away but years away. 1
Last year, companies like yours could get seed funding on MVPs and Series B or C funding on not-yet-profitable products. In this economy, it’s not going to work. Investors are looking for proven market acceptance.
Investors will only give the time of day to companies that show an efficient, reliable path for the product. They're doing the math now on your burn rate. There's a level of discipline that has not been seen in the investor class in 10 years — and they expect the same level of discipline from startups.
The silver lining? If you can prove product-market fit, you're ahead of the other contenders for investment capital.
It takes a toll on companies that look secure but are on shaky ground.
If your B2B tech or SaaS product was skating by with clients before?
Today it could be on the chopping block. Business buyers are demanding value, prioritizing products that make them more efficient2, and making do with less. Every expense will be under scrutiny. You'll see more churn and higher costs of acquisition.
At the same time, you'll face pressure to find your own savings. Can you afford to cut help desk service and customer training? It depends on the state of your product.
Pulling back those supports will reveal the truth. If your user experience is solid, your product may stand. But if you've been masking product design and experience issues, a suboptimal product may not find a place in your customer’s shrinking budgets.
For established products,
The next 18-24 months are going to be challenging.
Executives know it. Yet, if you ask tech and SaaS leaders how they plan to react?
The overwhelming majority believe they’ll “out-accelerate” the competition. The fact is, there will be winners and losers in the downturn.
Look around at your competition. Some may loom large today, but a number won't be here in two years. They'll be case studies of the recession.
Others will come out limping. The select few will emerge from the downturn stronger than ever.
Research from Harvard Business Review3 on 4,700 public companies shows that 17% didn’t survive a recession: they went bankrupt, were acquired, or became private. 80% were painfully slow to recover. Only 9% of the sample flourished after a slowdown.
Let's talk about what strategies don't work in a recession.
The fatal mistake is to accelerate at the wrong time. Founders have always been tempted to ship without testing, seduced by their own confidence in the product.
But doing so is like flying a plane without testing. In a lightning storm.
You may think you’re saving time and money by not talking to users, but without proven product-market fit, you may not get your next round of funding. Let alone revenue from paying customers.
For established B2B SaaS and tech?
The fatal mistake is denial. You may believe you can keep skating by with a suboptimal product. After all, you have costs to constrain. And your customers tolerated the product before…
Tolerance will be at an all-time low.
If your product is clunky, unintuitive, or redundant, they’ll notice. It won’t be enough to tweak your interface or tack on features. In today’s economy, making superficial fixes to UI is tantamount to fiddling while Rome burns.
Whether you’re a startup or established, know this, too: There is no safety in imitation. To make it, you need to be seriously differentiated, now more than ever.
So, where do you cut? Where do you invest?
Research from past downturns tells us:
Companies that came out of a recession strongest were selective. They only pared back where necessary. They made significantly greater investments than their rivals in R&D and marketing.4
How did they make the tough calls?
Last recession’s winners stayed “closely connected to customer needs — a powerful filter through which to make investment decisions.” 5
It’s your job to find out what your specific customers need, but there are two universals.
1: Customers will gravitate to products that have no close substitutes.
Your proprietary technology must be at least 10x better than the closest substitute.6 In ways that matter to customers.
This has always been true. But now, undifferentiated technology and software will be the first to fall in a crowded market.
Don’t guess. Build the discipline to discover what critical pain points your customers will pay more to solve.
Then, solve their problems 10x better.
That’s how you put serious distance between your product and every alternative.
2: Customers demand extraordinary experience.
No matter how powerful your product is, it will only survive if it makes your users more powerful.
Poor experience costs your customers too much in tough times.
So, how do you know whether your product experience is competitive?
You talk to users.
Every dollar invested in UX brings 100 dollars in return (Forester Research)7.
That’s an ROI of a whopping 9,900 percent.
Let me be clear, the goal is not merely to avoid failure, it's to come out stronger than before. By getting closer to users you’ll reveal opportunities: new markets, new offers, new product ideas.
Diversification is never smarter than in a downturn.
Take your cues from companies that came out ahead of the Great Recession (like Netflix, Mailchimp, Uber, Square, Salesforce, Adobe) and you can do more than survive. You can capture market share. Yes, even in a downturn.
Bear markets have proven to be breeding grounds for innovation. 8
During the Great Recession, I was with one of the world’s largest FinTech companies. We emerged stronger than ever, but in the flush times that followed, I saw too many products fail. Needlessly. Through sheer waste.
That’s why I founded UXReactor. We've made it our mission to bring rigor to product innovation and user experience.
Along the way, we've partnered with well-funded startups that have achieved unicorn status, disrupted industries, and been acquired by giants. UXReactor has been instrumental in designing a market-leading innovation for Nokia, creating a competitive advantage for a $1B networking company, and more.
By using a proven process for user-centered innovation, we've enabled our clients to generate multiple billions in additional value.
Now, you know what to expect.
You know what to avoid.
You know how to build your economic moat.
It’s up to you as the leader.
Even if you've never led through a recession, you have what it takes to protect your team and your company now.
But you must stay close to your customers. You must use insight to radically differentiate and elevate your product experience.
Make this a mandate for your people. Hold everyone accountable to the customer.
If you stumble, go back to first principles: user first, then experience, then design.