The effect of an (impending) economic downturn and (hard) Brexit on startups

I got this question from non-VCs a lot. Truth is most people in the economy live in and react to cycles and both an economic downturn and Brexit would affect them substantially.

For the startups, though, things are quite different. Below I’ll give some simple answers (if not too simplified) to these concerns.

The Bad

If you’re a startup that’s about to look for an exit, the timing is not so good for you. Especially if you’re FCF negative and have been relying on investments to sustain growths. If you’re FCF positive, you have more choices for exits or can simply ride out 2~3 years of downturn.

If you’re in a growth stage, it can also be challenging as all fundings tighten up. But that started already in 2016 so by now most startups in growth stages are used to it (or already died).

The Good

Believe it or not, there are a lot more upside for startups in an economic hard time whether as the result of natural cycles or triggered by political uncertainty such as Brexit. This is why so many great unicorns today were born in 2008~2010.

  1. Corporates usually cut spending and turn conservative in terms of innovation and marketing in a downturn. This is the best timing for nimble and risk-taking startups to leapfrog them.

  2. Economic downturns squeeze all operational margins, forcing B2B clients to look for other ways to improve efficiency. This opens up doors for productivity-improving B2B startups such as AI-powered robotics, automations, etc.

  3. Economic downturns also inspire innovations in doing businesses. The whole sharing economy was born out of the severe situations post-2008. Brian Chesky and his co-founders famously started Airbnb because they could no longer afford the rent of their apartment in SF.

  4. Startups (in general) have always been more efficient with capital than big corporates. In a downturn their strengths in capital efficiency will show through.

  5. Startups that started in a downturn usually exit at or near the peak of the economy, earning the founders and investors the best returns.

Conclusion

We VCs don’t particularly see downturns that much different from top of the cycles, other than advising our portfolio companies to close rounds earlier and faster and spend money more wisely. We continue to look for good founders to fund and enjoy being pitched even fresher ideas that usually come during downturns.

We stand ready to fund the best entrepreneurs, whether the time is good or bad.

Never go against a mainstream technology whose unit price keeps dropping every year

Robots are not replacing human beings...