Why a Recession Offers Huge Opportunities for Agile Startup Success
As inflation rises and politicians and economists hotly debate the possibility of a recession in some of the world’s major economies throughout 2022, startup founders have been watching the situation unfold with impatience.
But the truth is that turmoil in public markets has historically seen investors turn to safer private investments – including startups. And with the lowest cost of goods and services and the greatest availability of qualified personnel Talent in times of recession, many startups launched during times of economic instability have become some of the most successful companies in the world.
“There was a wave of high unicorns towards the end of the Great Recession in the United States that followed the global financial crisis,” said the director of inclusive economy. Patricia Pascuzzo said.
“Market conditions at this time were particularly conducive to their growth due to Federal Reserve policies that created an accumulation of capital around the world in search of investment opportunities. This resulted in a unusually high number of startups hitting the US$1 billion mark, which is the threshold for the unicorn label.
With the Federal Reserve and other central banks having hiked interest rates to combat runaway inflation, conditions aren’t as favorable for startups this time around. But Pascuzzo thinks we’re still likely to see unicorns emerging from the rubble of our current economic downturn.
“A tough economic environment is a strong test of a new entrant’s value proposition,” she explains.
“There was a wave of high unicorns towards the end of the Great Recession in the United States that followed the global financial crisis.”
“Freed from legacy systems and processes, new companies that can bring innovation and responsiveness to customers in the face of significant challenges brought about by the new macroeconomic environment will find receptive investors. New businesses that can demonstrate a unique value proposition during a recession are well positioned to survive any market environment.
Since the term was coined in 2013, some unicorns have become so successful that they are now categorized as “decacorns” – unicorns valued at over US$10 billion. And several startups that currently have decacorn status have also begun their journey under less than optimal economic conditions.
Below are five of the most notable examples.
When Bill Gates and Paul Allen founded software company Microsoft in the midst of a recession caused by the 1973 oil embargo, they were just two tech-obsessed childhood friends with a dream. Just over a decade later, Microsoft had gone public and was one of the most profitable companies in American history.
Although Microsoft did not initially realize the potential of the Internet, the company quickly developed its own web browser after Netscape released its revolutionary browser. An aggressive marketing campaign involving the bundling of Internet Explorer with the Windows operating system allowed Microsoft to gain a foothold. Today Microsoft is the third largest company in the world with a market capitalization of US$2.1 trillion.
Brian Chesky and Joe Gebbia couldn’t afford rent in San Francisco during the Great Recession, so they came up with the idea of earning a few extra bucks. After learning that a local design conference had booked all the nearby hotels, they threw three air mattresses on the floor of their loft and quickly created a website called AirBedAndBreakfast.com.
They ended up hosting three guests who paid US$80 each. Realizing the potential of their idea, they teamed up with their friend Nathan Blecharczyk to start their short-term accommodation business. Airbnb now has a market capitalization of US$64.8 billion and its three co-founders are billionaires.
When Uber exploded onto the scene in 2009, it turned the entire transportation industry upside down. The idea for the ridesharing app was born one cold winter night in Paris when co-founders Travis Kalanick and Garrett Camp couldn’t find a ride to a tech conference they were attending.
Camp became obsessed with the idea of developing an app that would allow people to book a ride on their smartphone. He bought the UberCab.com domain, convinced Kalanick to go into business with him, and the rest is history. Although it was founded during the Great Recession, Uber’s market cap now sits at US$57.5 billion.
Another unicorn of the Great Recession, cross-platform instant messaging platform WhatsApp was not originally designed for messaging. Tired of missing important calls while working out, ex-Yahoo! employees Brian Acton and Jan Koum created the app to display the statuses of users’ phone contacts, such as “At the gym” or “On call”.
When Apple introduced push notifications in 2009, Koum updated WhatsApp to ping users when their friends changed status and it quickly took off as a messaging app. Facebook (now Meta) bought WhatsApp for US$19 billion in 2014 and now has over two billion users in 180 countries.
Launched by Stanford graduates Kevin Systrom and Mike Krieger as the Great Recession drew to a close, Instagram took the world by storm. The photo and video sharing app had 25,000 users by the end of day one and 100,000 after a week. It hit one million users just 67 days after its launch and now has more than one billion active users every month.
In 2012, Facebook acquired Instagram for $1 billion in cash and stock just before its initial public offering (IPO) with the caveat that the company would remain independently run. Systrom and Krieger left the company in 2018 and Instagram is now valued at $33.48 billion.
- ‘Unicorn‘ is a term used in the venture capital industry to refer to a private startup worth more than US$1 billion.
- Most unicorns to date have been in the fintech sector.
- Many unicorns end up going public to gain access to the capital they need to grow.