Preparing Hong Kong Startups For the Coming Recession
Historically, recessions have had a major impact on the global economy and frequently occur on all scales, meaning periods of economic downturn are inevitable. In fact, the recent pandemic has caused a recession that we have just barely emerged from, while the Great Recession of 2007 to 2009 and the dot-com bubble are still fresh in many of our memories.
While Hong Kong fared comparatively well throughout the pandemic, the government reported a 4% drop in real GDP in the first quarter of 2022 – a warning sign of another recession. Fortunately, however, recessions are often bookended with periods of economic growth and general prosperity. The challenge for Hong Kong businesses and startups is to survive the recession and maximize their profits afterward. In this article, we will discuss how a Hong Kong startup can manage the coming recession.
Develop an Optimal Strategy
The first thing any savvy Hong Kong startup should do in anticipation of an economic recession is to plan and strategize. Only with a solid business strategy in place will your company be able to weather the storm and remain in business afterward. Here’s how to manage a startup before a recession:
Pivot your product or service, if necessary
Businesses find success if they bring something new to the table and satisfy customers’ pain points, needs, or other desires, but this all changes in the face of an economic recession. Forced changes in consumer habits will make people value their “needs” over their “wants”. If your product or service is something that people don’t really need, it won’t perform as well as before. You may want to consider offering something that people cannot live without.
Work towards building a sustainable brand
Venture capital funding has proven crucial to countless Hong Kong startups. However, financing is more difficult to secure during a recession. We recommend focusing on monetization and profitability before the recession hits so your business is less reliant on external funding.
Have clear plans, but stay agile
While it’s imperative to have a plan for your business, you must also remain agile enough to adapt to the recession as it unfolds. By nature, economic downturns are unpredictable and plans rarely play out well.
Consider Alternatives to Venture Capital Funding
The venture capital funding model is one of the best ways to secure quick and large amounts of capital to inject into your business. Countless startups solidify their foothold in the business world through these investments, as they allow them to prioritize growing the brand at a rapid pace – even if this means sacrificing profitability in the short term. However, venture capital can be hard to find and secure during an economic downturn. A Hong Kong startup in this situation would consider alternatives in advance, including but not limited to:
The more risky option, but if you have enough personal cash on hand or your startup can be monetized quickly, with the added benefit of having no dependencies on anyone else.
Depending on your personal networks and/or pitching skills, you may be able to secure funding from an individual in Hong Kong and beyond who believes in your startup’s mission.
Going into overdraft is a risky option, as you may have to file for bankruptcy if you fail to pay it back on time, but it can be a quick way to fund your startup if you truly believe it will succeed and can become profitable.
This is a more difficult route to follow during a financial crisis, but it could work if you can get enough people to back your product or service.
Listen to Warning Signs of Recession
Timing the exact dates of a recession is near impossible – even for the experts, so it is vital for startups to stay up to date with current events so they can see and spot the warning signs of an impending recession as it unfolds. Here are some to look out for:
The inverted yield curve
This is when longer-term yields offer investors worse rates than short-term yields. Each time the yield curve inverts, recessions have followed.
High levels of inflation combined with slow levels of growth causes an alarming increase in unemployment and often signifies a recession.
Worsening consumer sentiment
As inflation rises and consumer sentiment tends towards fear of a recession, spending slows. In a sense, this is a self-fulfilling prophecy of an upcoming recession.
Implement Cost-Cutting Measures
If a recession does come to Hong Kong when your business is still in its infancy, it will pay dividends to cut costs and free up as much cash as possible, as soon as possible. By implementing cost-cutting measures before an economic downturn, you’re preparing your startup to weather the storm before it happens. Some cost-cutting measures you could try:
Move to a work-from-home model
Depending on your employee count, you will be spending a considerable amount of money on office rent. Reduce this cost by moving to a work-from-home model, which has proven highly successful in recent years thanks to the pandemic.
Work with a smaller team
Smaller teams are comparatively more agile and easier to manage in a startup
Refine supply chains
Getting secure and great deals in your supply chain will help your business in more than one way during a recession. For example, prices of raw materials can skyrocket and make your products unaffordable to manufacture at your current price point. Predetermined pricing arrangements can make this situation easier to handle. Let’s look at another case – supply chain issues have meant that certain materials or parts simply are unavailable for some manufacturers. Having good relationships with suppliers can ensure you are among the first to get shipments.
Outsource what you can
Outsourcing parts of their business like HR and accounting rather than hiring in-house specialists can help businesses save a lot on overhead costs.
For a startup in Hong Kong to survive the coming recession, careful planning and a sound business strategy are imperative to getting through this challenging time. Business owners should pay close attention to the market and begin preparations well in advance if their startup is to survive and thrive in the long run.
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