Startup Corner #8: What happens to startups in a recession?
An on-the-ground look at how macro slowdowns cascade through the early-stage ecosystem
Hey friends,
We’ve been hearing more recession talk lately — not just in headlines, but in tone. Goldman Sachs recently put the odds of a U.S. recession this year at 35%. Not sky-is-falling territory, but enough to stop brushing it off.
So I’ve been thinking: what actually happens to the startup ecosystem when a recession sets in?
Not in abstract economic terms — but in the way money flows change, how people behave differently, and what all of that does to founders trying to build something real.
What follows is my attempt to unpack that.
When a recession begins to form, it rarely looks like a sharp cliff.
It’s more like a pressure system slowly moving in.
The first place you feel it is in confidence — not necessarily in outcomes.
Investors start taking fewer calls.
Hiring plans quietly pause.
Customers delay decisions “until Q3.”
And then, almost without realizing it, everyone is operating in a different emotional climate.
From an economic standpoint, recessions often begin when capital starts to tighten. Credit becomes more expensive, the stock market turns cautious, and large institutional investors (the LPs behind most venture funds) get more selective about where their money is going.
This, in turn, slows the cadence of capital calls into venture funds — which means that even though VC firms may have “dry powder” on paper, they don’t necessarily deploy it as quickly.
The result is subtle but profound.
Funding rounds take longer. Timelines stretch. Startups that expected to raise in six months now face a moving target.
The bar goes up — not because their business got worse, but because the environment shifted under their feet.
But that’s just the beginning.
As liquidity tightens at the top of the chain, the next domino to fall is operating budgets inside mid- to large-sized companies.
It becomes harder for buyers to justify new software. A tool that once passed through procurement with a single VP sign-off now needs CFO approval. Budgets get reallocated, deferred, or frozen entirely. Vendors are put under review. Even satisfied customers become “maybe next quarter” accounts.
This changes the sales motion dramatically — especially for startups selling into the mid-market or enterprise. Pipeline velocity slows. Close rates fall. Churn quietly increases, especially for products that aren’t seen as mission-critical. And for early-stage founders, that means you’re suddenly fighting two battles: acquiring new customers and holding on to the ones you already convinced.
For consumer startups, the shift is different but no less significant. In a recession, discretionary spending drops. People cancel subscriptions they weren’t fully using. They postpone purchases, downgrade plans, and compare more before they buy. If you’re selling a luxury, a “nice-to-have,” or something with a long payback period, your margins get hit — and your CAC may not fall in proportion. The bottom line tightens.
As revenue slows and capital becomes harder to raise, the next link in the chain snaps: burn.
Founders who once planned for 18–24 months of runway realize that their last raise might need to last a lot longer. This forces difficult conversations. Headcount is usually the biggest line item, so teams start making cuts. First, the experimental functions. Then, roles that don’t tie directly to revenue. The first round is rarely deep enough. The second one usually is.
Layoffs don’t happen all at once — they cascade. One company’s cuts spook the next, which prompts another board to rethink spend, which leads another CEO to act “proactively.” Before long, the whole ecosystem has shifted into defense.
But interestingly, this environment doesn’t affect everyone equally.
Startups that built with profitability in mind — or that operate close to cash flow — suddenly find themselves in an enviable position. Not only can they survive the storm, but they may pick up talent, attention, and customers that bigger, better-funded competitors have lost. Scarcity turns into an advantage when you don’t need to outrun the bear — just the other companies trying to raise into a shrinking pool.
This also creates space for new kinds of builders. In every downturn, there’s a surge in solo founders, small teams, and bootstrapped businesses.
Some come from layoffs. Others seize the moment.
They build lean, move fast, and focus on making something that people will pay for right now. These aren’t necessarily moonshot ideas. They’re functional, useful, sometimes a little unpolished — and very real.
At the same time, not every market slows equally.
Artificial intelligence — and the infrastructure around it — is one notable exception. Even in a downturn, companies see AI not just as a growth tool, but as a strategic necessity. Investment continues. Talent moves toward AI-related startups. Budgets stay open, especially for tools that offer productivity gains, cost savings, or operational leverage. But even in AI, the bar rises. Demos are no longer enough. Buyers want proof, traction, and real-world integration.
Lastly, there’s the matter of exits. When public markets cool, IPOs slow. But M&A heats up. Strategic buyers — especially cash-rich incumbents — start hunting for undervalued assets. Startups that might have raised a Series B eighteen months ago may now find themselves exploring acquisition as the best outcome. This isn’t failure — it’s liquidity in a different form. And in some cases, it’s the right move.
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So what does all of this mean for the startup ecosystem?
In short: recessions don’t kill startups. They just change the rules.
The expectations shift from “grow fast” to “stay alive.” From “topline at all costs” to “how healthy are your margins?” From “how big could this be?” to “how much can this do with what you have?”
And that’s not necessarily a bad thing.
Because once the easy money dries up and the noise fades, what’s left are teams that really understand their customers, products that deliver real value, and founders who build with clarity.
That’s the signal in the slowdown.
— RB
Startup Corner