Winter is coming for the global economy: 8% inflation, China in lockdown, a war in Europe, plunging capital markets, a pandemic that won’t end and a looming recession.
But for the tech and startup world, winter is already here. The stocks of public software companies have fallen 80% to 90% from their highs, startups large and small are laying off workers in droves, and VCs are publishing a slew of blog posts and PowerPoint presentations advising their portfolio companies on how they will need to survive for years without new funding.
The tone of the moment is that of uncertainty — the likes of which most of us have never experienced. No one knows how bad things will get or for how long. The rational response for many leaders is to batten down the hatches and prepare for the worst. This means canceling investments, freezing new hires and conserving cash.
However, prior recessions have taught us that the companies that cut the fastest and deepest — slashing costs, laying off workers — are not the ones to thrive on the other end of recessions. By going on a starvation diet, they become weak and have less ability to seize opportunities as the economy bounces back.
Layoffs are particularly destructive to company culture, lowering morale, engagement and productivity among remaining workers. They diminish internal corporate know-how and damage the image of the company with customers. The net result is that companies that resort to layoffs to survive adversity often end up less profitable and can struggle for years to regain their footing.
Limiting the number of full-time employees and using freelancers is one way startups can play both defensively and offensively to increase their options while controlling costs.
The takeaway? Playing defense in a downturn is not a recipe for success.
Often the companies that come out on top are the ones that find ways to play defense and offense at the same time. They end up taking market share from competitors and put themselves in position to dominate in the boom that inevitably follows.
This is not an easy balancing act. In the 2010 Harvard Business Review study, Roaring out of Recession, the authors found that a key element of success was the ability to reexamine and reconfigure the entire operation to reduce costs and increase flexibility.
For startups at the Series A or earlier stages that have a war chest of cash, there is a way to easily extend runway while maintaining flexibility and optionality: freelancers.
Freelancers can help keep your company’s burn rate low if you employ them for rigorously defined and budgeted projects. The scope and spend can be limited until there is clear ROI at a small scale. Once positive unit margins can be validated and revenue models become clear, freelance talent platforms can enable a working strategy to be scaled flexibly.