Every tech investor on the planet seems to be making the same observation right now, in light of the stock market’s downturn: Often, great companies are formed in bad markets.
Just look at Salesforce and Google, both of which grew rapidly during the 2000/2001 dotcom bust. Or now-iconic tech names like Uber, Airbnb and WhatsApp—they got off the ground during the 2008-2009 recession and subsequently flourished, despite some bumps along the way.
OK, I get it. This concept is a little self-serving. Of course, we want to believe our industry will continue to mint super-successful companies, despite stock-market volatility and an IPO drought! But I genuinely believe there’s a lot of truth to this idea—and that digging a little deeper reveals some key characteristics of companies that have been able to scale during recent economic downturns. And they offer lessons to today’s earlier-stage startups as they move through this current, uncertain period. Here are four tips:
1. Business models that offer opportunities to earn extra income, or help make ends meet, can shine.
Peer-to-peer marketplaces are the strongest examples here, in my mind. For example, Uber in its early days was an alternative for drivers who might otherwise have entered the taxi industry. The ride-hailing company helped people make up lost income during the 2008 recession and again during the Covid-19 pandemic. TaskRabbit, a marketplace for freelance labor, was founded in 2008 and afforded an alternative to traditional employment. These types of marketplaces provided a literal lifeline, in many cases, as people dealt with layoffs and other unfortunate circumstances. I’m certain we’ll see more creative, peer-to-peer marketplaces become mainstream in the near future.
One emerging peer-to-peer marketplace I’m intrigued by now is Turo, a car-sharing marketplace. Another is Neighbor, a platform where people rent out extra space in their homes and garage for others to use as storage. This may sound odd, but ten years ago people never expected to hail a ride from a stranger via their phones, or to rent out their spare bedroom or apartment for extra cash. Challenging times, coupled with easy-to-access internet technology, can be catalysts for dramatic change in consumer behavior.
2. Provide a cheaper and/or easier alternative to a current product or service.
In many industries, the most-sustainable, lower-cost provider will capture the most market share over the long-term—and this is especially true when times get tough. Post-recession, Airbnb (founded in 2008) provided a cheaper alternative to the standard hotel, in addition to helping property owners earn more income. A 2016 study by Morgan Stanley found 49% of Airbnb users used the service instead of staying in a hotel–and the top reason for using the platform was price. Similarly, in e-commerce, Warby Parker, founded in 2010, made it easy to purchase an affordable pair of fashionable eyeglasses online.
Online deals-and-coupon provider Groupon*, a company I was fortunate to have invested in, became incredibly popular after its 2008 launch amid a tough economy. When consumer pocketbooks tightened, people looked for new ways to save, and Groupon’s deals provided a way to enjoy a restaurant meal for less or enjoy an experience like an amusement park at a deep discount. The company also helped local businesses, which were feeling the effects of reduced consumer spending and needed better ways to attract local customers.
3. Similarly, “freemium” revenue models are effective go-to-market strategies during tough times.
In 2008, email marketing-automation service Mailchimp saw businesses cut back spending on many types of marketing. The company’s response? Give its service away for free—or at least up to 2,000 daily emails’ worth. Mailchimp’s “freemium” strategy—offering some portion of its service gratis but charging more for larger deployments and added features—was a fairly new concept at the time, though it’s very popular for tech businesses today. The strategy worked for Mailchimp: Within a year its user base grew from 85,000 to 450,000.
Another company that demonstrated the power of free was Slack, founded in 2009 as an online-gaming company. The company was nimble enough to pivot, however, and later built the now-ubiquitous online business and collaboration tool. Within 24 hours of the that product’s beta launch in 2013, over 8,000 people signed up. Within a year Slack had 285,000 daily active users, and over a million the following year. Today the more-sophisticated, paid version of the product is used by more than three million users.
4. Durable businesses provide sticky, mission-critical software.
Software has become an essential part of almost every business and industry. But the most powerful software products are ones that customers rely on to perform a critical business function and use daily, like a core system of record. These are “sticky” products–think Salesforce’s sales CRM, or time-and-attendance software–that users are loathe to give up, even during times of cost-cutting. For this reason, startups offering products on a subscription basis, often through long-term, enterprise contracts, often do well during tough times.
Businesses whose products produce some sort of “network effect”, meaning they become more valuable as more people use them, also can have an advantage. These offerings include SaaS-enabled marketplaces that aggregate a scattered supply in a given industry, like labor or materials. Or they could be consumer applications like communications platform WhatsApp, which was founded in 2009. Users of this service have an incentive to join and stay on the platform because their peers are also there.
It’s unclear how the economy will fare in the coming months. But some tech startups may have an advantage if a recession appears—and executives able to persevere and make tough, strategic decisions will always have a better shot at success in the end.
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*Denotes a Battery portfolio company. For a full list of all Battery investments, please click here.