Business founders share tips on how to survive a recession

In the midst of the global recession in 2008, two entrepreneurs struggling to pay their rent had an idea to rent out mattresses on their floor.

Over the next 15 years, Airbnb has become one of the biggest companies in the US, with a market cap of nearly $80 billion (£66.4 billion).

Starting a business in a recession might seem like an odd thing to do given the huge hit to consumer confidence and wider market challenges, but it might be the key to success.

A would-be entrepreneur could be working on something that will prove to be as successful as Airbnb, or indeed Uber, Disney and Microsoft, which also started in economic downturns.

This time round there are different challenges. While the UK may have dodged a recession so far, high inflation is posing significant challenges for small business owners.

Plucky entrepreneurs are not being put off by the current economic environment, despite higher energy bills, supply issues and inflation denting consumer confidence.

Recent Companies House figures show more than 700,000 businesses were registered last year – the highest year for new registrations on record.

We speak to founders who navigated the fallout of the 2008 crisis to find out the lessons they can share with budding entrepreneurs this time around.

Benefits of setting up a business in a recession

We have already seen the huge impact this period of high inflation and the corresponding rising interest rates are having on businesses across the board.

The technology sector has seen huge layoffs, despite a strong pandemic period which saw its revenues go through the roof.

Starting a business right now might seem a pie in the sky idea, and plenty of entrepreneurs will be considering putting their plans on hold.

But not all businesses are started when the economy is booming, and starting in a recession might actually bring some benefits.

Where more established companies are struggling, early-stage start-ups can afford to be a lot more nimble and keep their overheads at a minimum.

‘Starting a business is often about solving a problem or spotting a gap in the market,’ says Emma Jones, founder of small business network Enterprise Nation. ‘During downturns, people are more open to innovation and new ideas and let’s face, there are more problems that need solving. 

‘Businesses that start during leaner times are also very cost-aware, so they become naturally skilled at budgeting and managing cash flow – bootstrapping is a key skill for any entrepreneur.’

There tends to be less competition in periods of economic shock, which can clear the way for start-ups to gain a foothold and quickly grow market share.

Jones adds: ‘We are also seeing new businesses that are launching sustainable and energy-efficient operations in order to minimise energy costs. But this will also protect from fluctuation for the longer term and make them more resilient against future cost pressures.’

A recent poll by accounting software firm Intuit Quickbooks reveals 80 per cent of entrepreneurs who started a business between 2007 and 2009 said opening during a recession made them a better business owner.

Just under half said they had more confidence in their ability as an entrepreneur.

>> VCT manager Malcolm Ferguson on why a recession is a good time to start a business

‘Investing online has helped us’

One of the biggest headwinds small businesses faced during the financial crisis was securing investment.

After the crash, the banks became more risk-averse, battening down the hatches and showing less willingness to lend.

This was one of the biggest challenges for Stephen Andersen and Andrew Allen, who launched their interiors company, Papillon Living, in 2009.

A joint statement from Andersen and Allen said: ‘Very early on we naively thought we would get support from our personal bank, one we had a relationship with over many years… this turned out not to be the case.

‘That was a wakeup call, and probably slowed our expansion as we completely self-funded our growth. What you’re not aware of when opening a new business are all the hidden costs. 

‘Obvious ones like rent and rates you budget for, but there is often ‘cost creep’, so the broadband, the business landline, credit card terminals, employment costs and yes, all the red tape and bureaucracy you may be unaware of.’

Stephen Andersen and Andrew Allen launched Papillon Living in 2009

After a period of testing out products in their bricks-and-mortar store, Andersen and Allen expanded into online sales too.

The pair said: ‘We continue to thrive, and investing in online has proven to be a great way to support our customers who aren’t local. This is one of the key differentiators in business today, and back in 2007-2009 it wasn’t anywhere near as widespread as it is today. Nowadays it is essential to have an online presence as it is expected by customers.

‘Lenders are [also] more open to lending than they were back in 2007-2009. However landlords don’t appear to be so supportive, holding out for ever higher rents making it more challenging for new untried businesses to get a foothold. 

‘One area where this turns to favour businesses is in the growth of pop-ups. Landlords with empty units are very keen to attract pop-ups as it gives interest and life to the unit and can save them business rates and is a great way to test your proposition on future customers.’

Understanding your customers

When you start out in a recession there might be less competition, but you need to know exactly how your portion of the market works.

Harriet Hastings, who founded iced biscuit company Biscuiteers, found this difficult as the first company in the space at the time.

Milli Taylor launched her catering company in the midst of a recession

‘The idea of gifting iced biscuits was new and so there was a customer education piece and operational and manufacturing issues to resolve.

‘We hadn’t thought through the production well enough – with the experience we have now we would never launch a product without end-to-end testing.’

Others are lucky with the type of business they set up and what consumers want during a recession. Milli Taylor, who set up Milli’s Catering after university, found her café did well despite a dip in consumer confidence.

‘I think we were very lucky in the type of business we set up, as during the credit crunch we were impacted by the “lipstick effect” – consumers were making smaller luxury purchases as they tightened the purse strings.

‘This meant that in many cases rather than going out for a meal in a restaurant, people would instead meet friends for a fresh muffin and a proper coffee at a café to save some cash. This obviously worked massively in our favour.’

‘The only way is up’

When first starting out in business there is an overwhelming amount of information out there to get to grips with.

If you work in hospitality or retail, fewer customers as a result of the cost of living crisis will prove a huge hurdle to overcome. There is also a significant lack of Government support when it comes to helping out these industries in the face of higher bills.

When Biscuiteers started out in 2007, Hastings said the firm ‘didn’t really need to think much about recession’ because the only way was up. 

She added: ‘In fact, I think it can be a good discipline to launch a business in tough times.

‘As a much bigger business this time round we have to think much harder about giving our loyal customers value and controlling our costs with the focus on improving productivity to enable us to hold our prices.

‘Good businesses can come out of tough times leaner and stronger, but the key is to be flexible and find ways into new markets to support growth.’