As the world grappled with the 2008 recession, the mere thought of investing in a startup would have been deemed ludicrous by most investors. Yet, it was during this period that Airbnb's foundation was laid.
Fast forward to 2022, and Airbnb is a vacation rental behemoth, having raked in a whopping $8 billion in revenue last year. In fact, by the time the company went public in 2020, Sequoia Capital had seen its investment worth $260 million soar to a staggering $4.8 billion!
And this phenomenon isn’t exactly rare. Companies such as Uber and Slack that are now household names also emerged during periods of financial strife.
While common perception leads many to believe in the safety of investing in assets like gold during a recession, it is prudent to note that opportunities also lie within adversity. Investing in startups may seem like a fool's errand during a bear market, but the next Airbnb may just be waiting to be discovered.
So, for those willing to take the risk, a recession may be the ideal time to strike gold.
The Long Game
Startup investments, by default, are long-term in nature. They operate on a 5-10 year horizon at the very least when it comes to generating returns for investors and if history is anything to go by, recessions on average last less than a couple of years.
Unlike publicly listed companies that may see their stock being hit left, right and centre due to market sentiment, startups inherently do not carry that problem.
Blessing in Disguise?
For many startups, an untoward event or a recession may actually be a blessing in disguise. If we take the example of Airbnb, the timing was impeccable because both demand and supply were taken care of.
It gave homeowners an opportunity to earn a few extra bucks, and provided travellers an affordable alternative to hotels, all during an economic downturn.
Closer home, the likes of BigBasket and Swiggy saw widespread adoption during the pandemic as the coronavirus forced people to stay at home, leading first-time users to discover the convenience that these companies had to offer.
Catastrophe Breeds Innovation
Startups can arrive at an MVP 10x faster than mega corporations with 10x resources. That’s because they are agile and innovative from day zero. Most startups go through plenty of hits and misses before arriving at what really works for the business and this gives them the edge.
During a recession, startups can often identify and capitalise on new opportunities that larger, more established companies may be too hierarchical to implement in time.
Testing Resilience
A downturn also means that the access to external capital for startups is going to be more difficult, leading to the death of several companies. But the ones that remain are also the ones that are more likely to succeed in a healthier environment.
Survival of the fittest applies here as well, with companies that are not up to the challenge will disappear.
In fact, this may actually lead to the ability to access top talent who are unfortunately and invariably laid off, as well as form vendor contracts at a steep discount to usual levels.
Corrected Valuations
Inflated valuations led by bull markets end up in bubbles that burst during a downturn. While lower valuations may not be ideal for existing stakeholders, startups still need cash to grow until the economy begins to recover.
With such corrections in order, it’s a good time for early-stage investors to take contrarian bets that may bear fruit in the long run.
