Downturns are a Great Time to Grow
When a system shock occurs, our natural instinct is to view this - and the uncertainty it creates - as negative. And as organizational leaders, negative is often equated to a possible downturn. The Survive Reset Thrive approach asks you to reframe how you view shocks and uncertainty: rather than inherently bad, instead see this environment as one with possible upsides. Opportunities are always available to those who are prepared, stabilized, and willing to undergo resets.
But what happens when a shock does produce a market downturn, or recession? They are often accompanied by a self-reinforcing cycle of fear, which leads to panic and premature freezing of spending and investing, which translates into the slowing of capital flows and the beginning of lay-offs, which leads to more panic. These effects can ripple through public and private markets into consumer sentiment, and the doom spiral begins. But macro downturns are not necessarily micro downturns. If you prepared - embrace these times, as downturns can be a great time to grow!
This is not a catchy slogan - there is empirical evidence that supports this. While technological and societal advances (such as the iPhone launch in 2007) helped, some of the highest performing companies of the 2010’s (Uber, Airbnb) rose from the ashes of the 2009 Great Financial Crisis. And great companies emerged before them from other previous downturns: Microsoft (founded 1975) from the economic turmoil of the 1970’s, Netflix or Google (founded 1997 and 1998) from the 2001 recession, and many more. And despite technology stocks falling more than 30% in the USA in 2022, by late 2023 several high-performing companies, such as Nvidia, were emerging with sustainable growth paths.
Many reasons make downturns a great time for growth; below are six of my favorites.
1. They are a great time to hire – and keep - talent
Financial capital becomes scarce in downturns, but human capital becomes more available. When there is a market shock, big public companies stop hiring and then start cutting management; technology companies freeze hiring and consider layoffs, growth companies get scared, and private entrepreneurial companies feel left behind if they are not in a cost cutting posture. While in the quarters before, attractive job seekers would have five or six offers, now they may have only one or two. If you keep your mettle and have a clear growth story, this is a great time to hire talent. More so, it’s also easier to keep great talent as most of the siren songs of obscene wage offers have fallen silent. To take advantage of this opportunity you must have a clear and meaningful purpose, strong and compelling employee value proposition, and the credibility that you are or will soon be a Thrive company.
2. Focus matters; Scrappy forces innovative approaches
Focus provides clarity and enables you to channel your critical resources into the areas that matter the most. We often describe successful early-stage growth companies as ‘scrappy:’
devoid of the resources and brand recognition of larger companies, they are forced to be creative, resourceful, and agile. Scrappy is using limited resources to your advantage to force new, innovative approaches: it is not synonymous with severe cost cutting, which often leads to malaise and lack of motivation from talent. Companies that channel scrappiness over slowness focus on what matters the most for value creation and therefore enjoy more successful growth journeys. Airbnb CEO Brian Chesky consistently extols the powers of limited resources, focused work, and a ‘scrappy culture’ in building novel solutions, and he credits this with the company’s success – most recently in recovering from the 2020 pandemic. Over-funded and over-resourced companies often struggle, as excess resources can lead to over-hiring, failing to kill lagging projects, and sinking time and money into distractions. Execution requires focus. Strategy is not about doing things right but doing the right things. A downturn can bring scarcity, and scarcity when channeled as scrappiness forces you to focus on what matters most.
3. Customers make better decisions
While downturns feel scary as you fear losing customers and share of wallet, they can be the best time to retain and keep customers – if you have a differentiated offering. In downturns, customers make smarter decisions, and in upturns customers often make silly decisions. When inflation is low and cash seems limitless, both professional customers and consumers will try new things out of curiosity and overextend on options or subscriptions. When things get tight, solid value propositions matter, as customers will cull the excess and keep only the products and services that continue to solve critical problems or meet serious needs. For companies that deliver real value, downturns become a great time to solidify their customer base and accelerate growth.
4. Fundamentals matter
Fundamentals matter – unit economics, customer retention, cash flows, and the tradeoff between customer acquisition costs and lifetime value. Investors and leaders sometimes forget this – because overexuberant markets let them. When downturns hit, the sting of lacking fundamentals can be too much to overcome. For companies that have them in place, the base is built before the market tells you it needs to be. Fundamentals provide a solid foundation for growth, enable confidence, and foster continued execution while acting as a launchpad while others are floundering.
5. The Tourists have left town
In downturns the froth is blown off the ecosystem. Good companies often get punished in frothy markets because so-called ‘zombie companies’ get over-funded, an obsession with growth at all costs takes over, and land grabs become the default business model rather than a conscious choice. More and more companies pursue dis-economic initiatives and get rewarded, and companies practicing prudent management of their balance sheet may feel outsized pressure to be more cavalier than what would otherwise be pragmatic. This leads to unrealistic expectations from investors and lenders, overwhelming consumer choice (usually exacerbated by companies pursuing customer acquisition with free or unsustainably low offers) and valuations (public and private) with unsustainable growth baked into them. True entrepreneurs love when froth leaves the system! It’s better to grow when competition is less intense, there are more acquisition candidates, and market opportunities are clearer for those that have prepared.
6. Learning velocity increases
Longtime Berkshire Hathaway leader and Warren Buffet’s partner Charlie Munger once remarked ‘You have to keep learning….. When the world changes, you must change.’ Downturns provide the most fruitful environment for learning, and as in chapter 10, those that learn faster grow faster. Limited resources focus lean test and learns and constant experimentation, sharpening the learning capability of the wider team. Customer feedback becomes more forthright: in macro slumps both businesses and consumers are increasingly candid about what they are really willing to pay more for, and what they are not. Learning loops become shortened as the pressure to move heightens, and these learnings – when captured and shared quickly - increase the velocity that they are embedded and used.
Downturns can be growth vehicles if you are willing to change. There are growth opportunities available, and preparing your company to seize them can be a compelling call to action. But these opportunities come only to those willing to adapt and change. Part of why downturns are great is most companies are not willing or able to change: use your willingness to reset as fuel for your competitive advantage! Insanity is often defined as doing the same thing over and over again and expecting different results, and executing the same strategy as the situation shifts around you and your beliefs have been challenged will not set you up to grab growth possibilities.
Great does not mean easy. Being a great time to grow does not mean it’s an easy time to grow. In a downturn, some things are much harder, notably raising capital. You can address this by employing steady-state Survive (chapter three), having solid fundamentals, and maintaining a strong strategic story. Having a strong cash runway allows you to weather the brief storm of capital flight while still executing towards Thrive. While valuations may take a temporary hit, leave your ego aside, and do not equate it with your company’s performance potential. Try to avoid being in a position of a forced raise, sale, or other shareholder events. You may need to pause or slow a strategic priority that requires capital investment, which is ok. Keep testing your beliefs and assumptions and increasing learning to invest incrementally as the situation progresses.
As entrepreneurial leaders, we do not need it to be easy to be great. Uncertainty is inevitable, and it always contains growth opportunities, even in the event of a downturn. What separates high growth companies from others is learning velocity. If you foster a culture of empowered and agile learning while moving across the three modes of the SRT loop, you can grow faster, regardless of the market situation.
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*This blog posts appears as an Appendix in the upcoming Survive Reset Thrive book published by Kogan Page February 2024.
As captured in Berkshire Hathaway’s 2022 Annual Letter, available at: https://www.berkshirehathaway.com/letters/2022ltr.pdf
