Studies show that opportunity recognition and innovation in tough economic periods are stronger … [+]
“There is a tide in the affairs of men. Which, taken at the flood, leads on to fortune,” William Shakespeare. Business is all about seizing opportunities. Understandably, many entrepreneurs see turbulent times as periods of deceleration in venture initiation, innovation and growth. When the going gets tough, most entrepreneurs will pass on incredible opportunities leaving all the rewards to the few who seize and persist.
In fact, studies show that opportunity recognition and innovation in tough economic periods are stronger determinants of startup success than in periods of economic prosperity. Research further shows that the novelty of the product and service opportunities captured and introduced by startups launched during weak economic periods is significantly higher than solutions introduced in a thriving economy.
The results can be explained by entrepreneurs’ willingness to make bolder decisions focused on long-term returns. Since economic activity generally declines in slow economic periods and because most entrepreneurs will prioritize survival and short-term profits over innovation, leaving opportunities on the table, those who invest to create, reap the benefits. Here are three key imperatives that startups should follow to drive long-term success in turbulent times.
1. Differentiate Between Business Opportunity And Necessity
Necessity-driven new ventures are when entrepreneurs choose entrepreneurship to substitute, complement or replace another business or a job during weak market conditions. Unlike necessity startups, research shows that opportunity-driven ventures are more likely to innovate and thrive in turbulent times. It is when entrepreneurs recognize an opportunity, understand that weak economic conditions will eventually reverse, and prioritize long-term over short-term returns.
Economic downturns, especially if they last, are the best time to bring new startup ideas to market. During these periods, most entrepreneurs and companies will reallocate their assets towards safer bets, which gives innovators and initiative takers room to get ahead of the curve.
2. Focus On Customer Success
One of the benefits of an economic downturn is that it gives you time and forces you to take it. While speed is important for startup success, the faster you go, the more likely you’ll make mistakes.
Building your solution progressively by prioritizing customer involvement, even if you’re only serving a few customers due to a slow economy, allows you to nail down the core of your product and build the next phases on strong foundations. This way, by the time the market catches up, you’ll have a proven product ready for scale.
3. Focus On Customer Retention
Growth declines during a harsh economic climate. Parallel to investing in projects with long-term returns, the goal is to sustain business success. Because it is cheaper to keep a customer than acquire new ones, ensuring customer success is crucial to your short and long-term startup success.
Furthermore, if you’re truly invested in the future, economic downturns, especially long ones, are the best time to capture market share when your competitors are focused on staying in business. Turbulent times can give you leverage in many ways to negotiate terms and pricing. This is often the time to make winning bets with a higher probability of success.
Studies show that venture capital funding doesn’t significantly change during tough economic periods. What changes is their investing strategy which tends to prioritize startups that operate in their core sector to have more control over their success through connections and mentorship, and to mitigate information asymmetry. If you’re seeking funding, look for investors that funded startups in your sector. This is a good rule of thumb regardless of market condition.
Economic downturns force startups to evaluate value-adding business units and initiatives. It is a good time to take a hard look at what makes your successful startup successful so you can focus on what contributes directly to your ability to deliver your value proposition and eliminate distractions. Above all, be patient. As in the expression, when the going gets tough, the tough get going. Longevity is a differentiator.