Global stock markets were swimming in red ink on March, 9th 2020. The S&P (Standard & Poor’s) 500 index decreased by 7.6%, and the FTSE 100 (Financial Times Stock Exchange) experienced a similar drop, according to figures from The Economist. So, will this looming economic crisis be worse than in 2007–2008? It’s hard to say. When the WHO announced a global emergency for COVID-19, IBM stock went down by 17%, while in 2007–2008, it had gone down by 21%.
All these numbers indicate that there will be an approaching financial crash, and tech startups should be ready to tackle its negative outcomes. Thus, if you run a business in the tech industry, there are several important steps you can take to brace yourself for the coming turmoil, including outsourcing, optimizing operations, reducing payroll, and becoming more time-efficient. For startups, crisis might become an opportunity, and we’ll tell you how with our startup crisis-management tips.
Tech Companies and the Looming Crisis
There should be no doubt in anyone’s mind that there is a crisis coming. The US Fed has been bailing out banks for decades now (see the “Tequila Crisis” of 1994). What happens is that banks lend out money, the debtors default or threaten default, and then the Fed prints out a huge pile of cash to make sure the banks don’t have to take a haircut.
Think about our position right now. We’re riding a bubble that has been burst and burst again in the past, each time demanding a greater response. The Dot-Com bubble in the late 1990s was a direct result of Fed intervention, when they, among other things, bailed out banks that had lent money to Mexico when the peso dropped precipitously. The housing bubble was also a direct result of this Fed intervention, and when it blew up in everyone’s face they doubled down on their policy of bailing out the banks (remember “quantitative easing”?).
Nothing has changed, and now the “everything bubble,” as it’s being called, is bigger and worse than the previous two bubbles combined.
But just how bad are things?
How Bad is the Current Situation?
Mid-March 2020 has seen two major factors contributing to a plunging market: the coronavirus outbreak and the oil-price dispute.
The Spread of COVID-19
US President Donald Trump has just announced a 30-day travel ban from Europe. The Dow has ended its 11-year bull streak and entered a bear market. The S&P 500 narrowly avoided bear status—for now. And the World Health Organization has declared a global pandemic.
The market is plunging due to fears of viral outbreaks. And there’s another major factor affecting the world economy, the oil-price war.
The Oil-price War
Whereas Russia and Saudi-Arabia had followed OPEC production quotas, they have decided to abandon those and open the taps. In other words, they are going to start pumping out oil as fast as possible.
In short, producers are taking huge cuts in a race to the bottom, and oil prices are plunging. What we are seeing now is the worst oil-price crash since 1991. Many of the traders who are snapping up as much crude oil as possible are doing so on super low-interest loans.
A global economic crisis seems very likely. And if these events aren’t enough to trigger it, then it will only be a matter of time, since Fed intervention got us into this bubble in the first place, and we already know exactly how that turns out.
Cost-cutting Measures for Startups
This economic environment can be intense for startups. But the good news is that there are four key measures a tech startup can take to make sure it rides out the coming turmoil as smoothly as possible. The most important goal for any business—and startups are no exception—is to emerge on the other side of the hard times stronger than ever, even if it means trimming some fat off in the meantime.
If you’re thinking of just getting started, you have a unique opportunity to think about these tips from the outset, so you can stand out as truly competitive among startups founded during a financial crisis.
Outsourcing is a proven means of making your company more efficient and your budget more cost-friendly. The reason it works so well is that you leverage another person or company’s skill, efficiency, and time.
Many freelancers or consultancies have excellent systems in place to efficiently plug into your workflow without creating a bottleneck in your production. Outsourcing is an effective way to bring in more team members without sacrificing your autonomy—in other words, you can avoid an autonomy crisis in your startup.
Since we already live in a gig economy, outsourcing is more viable than ever, since so many people are offering their services on a contract basis.
Speaking of systems, it is well worth your time to step back and take an objective assessment of your company’s current operations.
Ask yourself, what are the most time-consuming parts of our everyday work? Where do we lose the most efficiency? Where is the most friction in our production process?
Maybe it’s administration. Maybe it’s quality control. Maybe it’s simply sitting down and writing code. There are myriad ways that could improve efficiency right now to optimize your business in the face of the coming crisis.
Nobody likes the sound of downsizing, but it just might rescue your startup when the funding starts to dry up. In a startup financing crisis, you need to be as competitive as possible to show investors your company deserves top priority.
Investors like to see companies that have happy, loyal employees, but you can’t create this scenario while simultaneously trying to build the team bigger and bigger.
While taking a pay cut sounds harsh, it’s a good idea to be upfront with your team about the circumstances. A battle-tested alternative to simply reducing pay is trading liquid income for shares in the company. When employees have skin in the game they will be motivated to work harder than ever.
Becoming More Time-Efficient
Efficiency is hard to measure in some cases because inefficient systems can sometimes give the illusion of productivity. Why do startups fail so much nowadays? Poor management is one of the top reasons for it, so it is highly important to become time-efficient. Meetings can be especially bad in this regard.
You should probably stop having so many meetings. Think about how you could substitute synchronous meetings and discussions for asynchronous ones. In other words, can you each leave a brief message on Slack instead of spending an hour listing off updates one at a time? Everyone can catch up when they are free, instead of blocking off unproductive time to listen in real-time to every share.
Are Startups Safe in Crisis?
In the Bible, there is a story about one of Pharaoh’s officials who knew that the present plenty was only temporary, and that lean years were coming. He set aside huge amounts of grain and probably seemed to be taking extreme measures by the other officials. However, when the lean years struck, there was plenty of grain to go around, and Pharaoh made such a killing during those years that he became nearly the sole landowner in Egypt.
So, are startups safe in a financial crisis? That depends on how you navigate the economic changes. What steps can you take to make your tech startup leaner and meaner before times get rough?