Recession-Proof Startup?

The recession continues.  TImes are tough.  The markets continue dropping, unemployment rates are rising, and investments in startups are starting to dry up.  Yet many tech startups continue to thrive during these hard times…but how?
In my recent article, “Winter is Coming” – Will Your Startup Survive?, I highlighted the value and importance for founders to learn how to bootstrap.  However, bootstrapping alone won’t allow your tech startup to thrive through the coming tough(er) times.  Managing your corporate expenses is key – but meaningless if you have no revenue!  So how do you build a recession-proof tech startup?

Building a recession-proof startup requires designing a product that satisfies these three simple criteria:

The Product Is A “Must-Have” Not “Nice-To-Have”

Tech startups that are looking to launch in these challenging times should target product ideas that solve major problems for customers; not just minor inconveniences.  What do I mean?  Recession-proof startups sell products that customers can’t live without; thus their products become necessities (must-haves) and are not just luxuries (nice-to-haves).  Even in the toughest of times, customers don’t give up everything.  They tighten their budgets and prioritize their expenses.  You’ve likely done it yourself.  You begin by looking at all your monthly expenses and start dropping the luxury items – these are the easiest hits.  Dining out, that extra cable bundle, monthly movie subscriptions, the overpriced coffee every morning…these things get dropped from the monthly budget.  These are the “nice-to-have” items – they are products that customers, during bad times, are willing to give up.  You don’t want to build your startup around these kinds of products.  Granted, you may make money on these “nice-t0-have” products during good times, but as soon as a recession kicks in – you’re in trouble.  Customers may like your product but they just don’t need them = declining revenue during economic downturns.

The Product Saves Customers Money

During recessions, besides dropping “nice-to-have” items off their monthly expenses, customers seek out cost-saving product alternatives.  If they can get cheaper Internet service, cable, mobility plan, groceries, etc. – they will.  As a result, recessions can represent periods of significant growth for young startups that have aggressively positioning themselves as cost-effective market alternatives.  The key to success for these startups is to ensure that strong margins are maintained even though their pricing may be lower (…back to my previous article about knowing how to bootstrap).

The Product Addresses Large Niche Markets

During tough economic times, in almost every market, there are fewer buyers.  Simple.  For this reason alone, you want to build your tech startup around products that address a large potential market.  Now, I’m not saying to build products that are loaded with features that try to be everything to everyone (which we know doesn’t work!).  No.  You need to build a great product that addresses a major consumer problem in a niche market.  But in order to be recession-proof, you need to make sure the niche you select, in terms of total market potential, is large enough to allow your startup to grow even through difficult economic times (when there are fewer buyers).

These are lessons we’ve learned over the last few years having designed products that have both suffered and prospered through this recession.  Our successful product has been Tether – a smartphone application that allows users to access the Internet on their laptops through their existing smartphone data plan.  We launched this product during the early stages of the recession and have experienced success even as the recession continued to worsen.  Why?  Because Tether is a product that satisfies the three recession-proof criteria:

  • It solves a major customer problem and is a “must-have” for customers who need Internet access on their laptops when away from their home or office (for them, the Internet is their “lifeline”),
  • It is a cost-effective solution that saves customers money compared to the expensive alternatives such as Aircards, 3G sticks, or carrier-based tethering solutions, and
  • It addresses a large niche market, namely “road warriors” who carry both a laptop and smartphone.

It’s amazing the number of tech startups (many Web 2.0) that are launching during this recession with products that don’t satisfy these three criteria.  Are they recession-proof?  Will they exist in a year?

With the new insights that we’ve gained during this recession, we have certainly changed the way we evaluate new product ideas and now we focus on disruptive technologies that satisfy the above three criteria.  A rather simple strategy for unpredictable times.  What’s yours?

If you enjoyed this article, please follow me on Twitter (@tburke_quark) for more on tech startups, entrepreneurship, leadership and innovation – thanks!

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