We are all observing the series of reports about startup layoffs. Affecting various sectors, they seem to indicate that the long predicted tech downturn is starting. Indeed, we are observing a significant negative shift in risk appetite and funding availability in the wider technology ecosystem. A number of prominent startups in verticals such as instant grocery delivery are scaling back their operations. Undoubtedly, we are entering a slow down. What is not certain yet, though, is its scale and duration. 

The best time to prepare is now, and certain startups are doing that by scaling their operations and protecting their runway with layoffs. The arguments for this seem to be based on lessons learnt from previous bubble bursts. And although it may be tempting for analysts and founders to look at the past to inform the future, focusing on cutting headcount first could in many cases be counterproductive.

The current downturn is not the same as the recession of 2008

The last tech recession back in 2008 isn’t going to be very useful in telling founders what to do now. European tech is radically different and areas like fintech are almost unrecognisable. In terms of scale, the industry is many multiples bigger. Whereas in 2008, fintech was largely around payments and transfers, today, it impacts every part of how businesses and consumers use money. Fintech infrastructure startups are an intrinsic part of how many businesses operate in most countries and nearly every vertical. The same is true for other tech categories, from SaaS to ecommerce, through to cybersecurity and martech. We aren’t going to see a recession that uniformly knocks back every type of startup. The European tech industry is simply too broad and deep for that to practically happen. Fintech itself is likely to experience more of a mixed bag. Pure tech startups that have higher margins and good capital efficiency are going to fare a lot better than their ‘tech-enabled’ counterparts. 

VC capital not only fuel to startup growth

The second important difference is that the startup scene is not entirely reliant on VC capital to fuel growth. In 2008 the collapse in funding meant that new startups were hobbled, failures were exacerbated and growth severely curtailed. Crucially, viable startups were caught up in the storm. With no way to extend their runways they had to make deep cuts which damaged their businesses and made recovery difficult - and in some cases - impossible. Not only did this prolong the recession, it helped cause a domino effect impacting every tech vertical. Now, we have a large and rapidly growing alternative financing scene. There are scores of companies offering numerous ways for viable startups to continue to get capital. Traditional finance is also very different. Previously, getting a loan from a bank was essentially out of the question for many startups, now it’s a real option. Although many alt finance startups get their capital from VCs, most have built up war chests of credit over the past few years. For example, Capchase has raised hundreds of millions with our last round as recently as February. The sector is more than capable of picking up a lot of the slack as VCs retreat. 

The final difference, which I’ll mention briefly, is that the nature of this downturn is very different. 2008 was a broad based financial crisis. This recession is inflationary and largely down to supply chain and political issues. It is not going to be as deep as 2008 - and may even, with a bit of luck, be fairly brief. You have to remember that as the pandemic hit in 2020 most commentators believed that we were heading for a huge global downturn and even a global depression. The reality was that economies bounced back and the tech industry actually experienced its biggest year in 2021.

Don’t clip your fintech’s wings with layoffs

With this context in mind, fintech founders shouldn’t feel pressured to quickly cut the size of their team. Making layoffs to protect the bottom line can actually become a self fulfilling prophecy. This is because the first team members that are let go are often in functions such as communications, sales and customer service. Inevitably this impacts the customer experience and the ability of a startup to continue to grow. It also reduces team morale, as they have to take up the slack and perceive that the promising startup they joined is now struggling. If the recession is, as I suspect, going to be shallower and focused on overheated parts of the tech industry, startups that have quickly cut their headcount will find that hiring talent will be difficult and much more costly. Their competitors who haven’t made the same layoffs will have a clear advantage in taking advantage of any post-recession boom. In some cases, they may find their former team members have created their own ventures that represent a direct challenge. 

That is why it is paramount that founders block out the noise from the wider market. Instead, focus entirely on your own startup’s circumstances. This will be the key to managing this downturn. Not the reasons why startup x and y are cutting their operations by z%. Founders should use this period as an opportunity. Recessions tend to offer opportunities to well run businesses. Whether that’s by acquiring the customer base of struggling competitors, or preparing your startup to scale rapidly when demand rebounds. 

Of course, keep managing your runway diligently. Have a look at your operations, where can they be streamlined? You may want to make temporary reductions in expenditure and consider freezing peripheral activities. Talk to your existing customers and make sure they are happy. Analyse your sales and marketing strategies. Can you pursue a more aggressive strategy to ensure that growth continues?

The crucial takeaway is that founders should double down on efficiency and performance rather than cutting the meat of their business. Seeking out alternative financing can provide a warchest, and reduce the pressure to seek external funding over the next year. The main message is that you do not want to be fundraising at the moment and feeling pressured to immediately cut the size of your team.