Business founders share tips on how to survive a recession

In the middle of the global recession in 2008, two entrepreneurs struggling to pay their rent came up with the idea of ​​renting out mattresses on their floors.

Over the next 15 years, Airbnb has grown to become one of the largest companies in the US, with a market capitalization of nearly $80 billion (£66.4 billion).

Starting a business in a recession may seem odd given the huge blow to consumer confidence and wider market challenges, but it could be the key to success.

An aspiring entrepreneur could be working on something that will prove just as successful as Airbnb, or even Uber, Disney and Microsoft, which also started in economic downturns.

This time there are several challenges. While the UK has so far avoided a recession, high inflation poses a major challenge for small business owners.

Brave entrepreneurs are not deterred by the current economic climate, despite higher energy bills, supply problems and inflation eroding consumer confidence.

Recent figures from Companies House show that more than 700,000 companies were registered last year – the highest number of new registrations recorded.

We speak to founders who weathered the fallout from the 2008 crisis to find out what lessons they can share with aspiring entrepreneurs this time around.

Advantages of setting up a business in a recession

We’ve already seen the massive impact this period of high inflation and associated rising interest rates are having on businesses across the board.

The tech sector has faced massive layoffs despite a strong pandemic period where revenues surged.

Starting a business now may seem like a pipe dream, and many entrepreneurs will consider putting their plans on hold.

But not all businesses are started when the economy is booming, and starting in a recession can actually yield some benefits.

Where more established companies struggle, fledgling startups can afford to be much more agile and keep their overheads to a minimum.

“Starting a business is often about solving a problem or discovering a gap in the market,” says Emma Jones, founder of the small business network Enterprise Nation. “During recessions, people are more open to innovation and new ideas and let’s face it, there are more problems to solve.

“Companies that start in lean times are also very cost conscious, so they naturally become adept at budgeting and managing cash flow – bootstrapping is a key skill for any entrepreneur.”

During periods of economic shock, there is usually less competition, which can pave the way for start-ups to gain a foothold and quickly gain market share.

Jones adds: ‘We also see new companies that operate sustainably and energy-efficiently to minimize energy costs. But this also protects against longer-term fluctuations and makes them more resilient to future cost pressures.’

A recent poll by accounting software company Intuit Quickbooks found that 80 percent of entrepreneurs who started a business between 2007 and 2009 said opening during a recession made them a better entrepreneur.

Just under half said they have more confidence in their abilities as an entrepreneur.

>> VCT executive Malcolm Ferguson on why a recession is a good time to start a business

‘Online investing has helped us’

One of the biggest headwinds small businesses faced during the financial crisis was securing investments.

After the crash, banks became more risk averse, shuttered and showed less willingness to lend.

This has been one of the biggest challenges for Stephen Andersen and Andrew Allen, who launched their interior design company Papillon Living in 2009.

A joint statement from Andersen and Allen said: ‘Very early on we naively thought we would get support from our personal bank, a bank we had a relationship with for many years… this turned out not to be the case.

‘That was a wake-up call and probably slowed down our expansion because we financed our growth entirely ourselves. What you are not aware of when opening a new business is all the hidden costs.

“Obvious ones like rent and rates that you budget for, but there’s often ‘cost creep’ like broadband, the corporate landline, credit card terminals, labor costs and yes all the red tape and bureaucracy you may not be aware of. ‘

After a period of testing products in their physical store, Andersen and Allen also expanded into online sales.

The pair said: ‘We continue to thrive and investing in online has proven to be a great way to support our customers who are not local. This is one of the key differentiators in business today, and in 2007-2009 it wasn’t nearly as prevalent as it is now. Today it is essential to have an online presence that customers expect.

Being lenders [also] more open to loans than in 2007-2009. Landlords don’t seem to be as supportive, however, and are sticking to ever-increasing rents, making it more challenging for new, untried businesses to gain a foothold.

“One area where this is working to the advantage of businesses is the growth of pop-ups. Landlords with vacant units are very keen to attract pop-ups as it adds interest and life to the unit and can save them business rates and is a great way to test your proposition with future customers.”

Understand your customers

When you start in a recession there may be less competition, but you need to know exactly how your part of the market works.

Harriet Hastings, who founded the ice cream cookie company Biscuitiers, was the first company at the time to find this difficult.

‘The idea of ​​giving ice cream cakes as a gift was new, so there was some customer education and operational and production problems to be solved.

“We hadn’t thought through the production well enough – with the experience we have now, we would never launch a product without end-to-end testing.”

Others are lucky with the type of business they set up and what consumers want during a recession. Milli Taylor, who founded Milli’s Catering after college, found her cafe doing well despite a dip in consumer confidence.

“I think we’ve been very lucky with the type of business we’ve created because during the credit crunch we were hit by the “lipstick effect” – consumers made smaller luxury purchases while tightening their wallets.

‘This meant that in many cases, instead of eating out at a restaurant, people would instead meet friends for a fresh muffin and a good coffee at a cafe to save some money. This, of course, worked enormously to our advantage.’

“The only way is up”

When you first start a business, there is an overwhelming amount of information to get to grips with.

If you work in hospitality or retail, fewer customers due to the cost of living crisis will prove to be a huge hurdle. There is also a significant lack of government support when it comes to helping these industries in the face of higher bills.

When Biscuitiers started in 2007, Hastings said the company “didn’t really need to think much about a recession” because the only way was up.

She added: “In fact, I think it can be a good discipline to start a business in difficult times.

“Being a much bigger company this time around, we need to think much more about giving value to our loyal customers and controlling our costs, with an emphasis on improving productivity so that we can maintain our prices.

“Good companies can come out of tough times leaner and stronger, but the key is to be flexible and find ways to enter new markets to support growth.”