How small and mid-size businesses can evolve to endure economic headwinds

We can't predict the future, but we have a clear sense of the economic unease permeating boardrooms and chat channels everywhere. However it shakes out, the uncertainty is having a considerable impact on small and medium-size businesses (SMBs), especially those in the tech and startup world.

Now is the time to take a breath, reassess, and act. Don't regret inaction.

In times of volatility, SMBs can come out on top by recognizing the moment, adapting, and evolving strategy based on the new economic conditions - whether that's inflation, more expensive capital, shifting customer demands, or anything else.

As we know, the Covid pandemic created a number of shocks and distortions to the system. Those distortions have a long life, and it's clear with rising inflation and the bitter pill of ameliorative interest rate hikes that their impacts will have an impact for some time to come.

The downturn that is likely to continue will affect many aspects of the economy at once, including supply chains, the market for labor, how and what consumers buy, lending practices, and more. How can SMBs, especially those in the tech world - prepare themselves?

Dependence on easy money

Many SMBs, especially in the tech space, have relied for a long time on access to capital to keep their businesses growing. This led to an emphasis on hypergrowth and pressure for companies to scale massively and quickly to beat out competitors and demonstrate returns for scale.

That meant that the company didn't immediately need a strategy to bring in revenue and secure profits, especially when it had access to capital at historically low-interest rates. Instead, they would secure more funding, hire more people, and expand as quickly as possible. The first mover advantage was real.

Thanks to shocks like the pandemic as well as the war in Ukraine, that dynamic is now quickly changing. Capital is getting more expensive, which means each and every dollar coming in has to be highly scrutinized before it goes back out.

Markets around the world are now re-evaluating businesses based on this new reality - and that reality is also being reflected in public markets. In fact, between 50 and 70 percent of software and internet companies listed as publicly traded companies have seen their trading prices dip below pre-pandemic prices. That comes even as some of these companies are increasing - even doubling - revenue.

Time to focus

We've learned from history that it's very important for companies - especially technology companies that are small or medium-size - to recognize moments of downturn, embrace the challenges that come with it, and develop a new strategy. The most important things these companies can do include focusing and shifting their plan. Markets aren't rewarding growth at any cost anymore. Instead, companies with more near-term certainty and profitability are now likely to be rewarded. Markets are seeing a strong preference for companies that don't just have potential but are generating cash flows today and are expected to in the future. That means that growth, with profitability improving over the long-term - even if slowly - is a good strategy for SMBs, in the tech world and beyond. In fact, SMBs have some advantages here - small businesses with more revenue-focused business plans might be spared the volatility affecting businesses singularly focused on hypergrowth.

Cutting costs

The recovery will probably take longer than expected, and the ability of companies to "hyper grow" their way out of it won't be an option. Businesses must adapt to survive.

One way to do that is by cutting costs and improving efficiency. That will help improve unit economics, no matter what your product or service is. Cutting excess spending on R&D or marketing might be one way to go.

Other companies are opting to slow or even freeze hiring, as we've seen with many of the big tech companies like Facebook, Amazon, Apple, Microsoft, and Google - or FAAMG, as these large, high-performing tech stocks are known.

Finding opportunity

With greater challenges also come opportunities for SMBs. Figuring out how to increase revenue now means being creative and innovative with products, services, and relationship management.

Hypergrowth isn't the answer for many companies anymore but moving quickly in other ways is. That means recognizing the moment and adapting budgets in things like R&D and marketing now is the smart move and could be beneficial for your company long term.

In some ways, having to focus on decisions that you would make if you only have six months of cash in reserves - versus a huge supply of cheap capital down the road - might mean you make smarter business decisions.

While hiring might be frozen at a lot of larger tech companies, this too could have unintended benefits for SMBs. In a labor market that has been tight for some time, recruiting is about to get a bit easier for smaller and medium-size businesses as supply increases.

Let's say it together: Take a breath, reassess, and act. Don't regret.

There are other opportunities as well. You just need to know where to look. The first step is to prepare for the challenge by recognizing the moment. And, well, we know the moment is now. Next, it's about acting definitively to increase efficiency, unearth more opportunities, and evolve your course. Then, breathe again.

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