Inflation, Interest Rates, and the Looming Recession: The Outlook for Tech Startups

America has some of the highest rates of new ventures anywhere in the world. In fact, 283 new organizations have been founded in the United States in 2022 so far, and that number will only grow. Early in January, Forbes reported that tech investment would stay strong and could even increase. However, the opposite has occurred, with global turmoil driving a severe downward turn in VC investment compared to the dizzying highs of 2021. Now, America is on the brink of recession, so how will newer tech startups fare if the economy starts to shrink?

Inflation and Interest Rates — The Current Picture

Inflation means rising costs — or more accurately, that each dollar is worth a little less than the previous year. In 2022, it turns out each dollar is worth a lot less than in 2021, with inflation hovering around 9%. This was originally driven by pandemic-related lockdowns and changes in purchasing habits, but also by supply chain issues – issues that continue to impact tech businesses awaiting components such as microchips.

The Federal Reserve is pumping interest rates up in an attempt to slow inflation by driving down the number of individuals and businesses relying on lines of credit. And, as goods become more expensive, employees demand better pay. Smaller businesses or those simply at the boundaries of their budget may not be able to afford to keep the staff they already have.

Eventually, spending may slow so much that the economy will start to shrink, leading to a genuine recession.

Are We in a Recession Already?

Alex Wilhelm of TechCrunch says that we simply don’t know if we’re in a recession. Citing outlooks from Goldman and the Federal Reserve Bank of Atlanta that mostly contradict each other, it’s clear that the reality of recession depends very much on who you talk to. Some of this could be optimism from VC firms that simply won’t be as badly affected, having plenty of long-term prospects and diversification to fall back on. The overall theme is that it’s going to be more difficult for startups to raise capital than in 2021, but not impossible.

Gartner’s recent ThinkCast covered several ways tech businesses can navigate a potential recession. They noted that 63% of financial officers believe this inflationary period will continue for the next 12 months, if not longer. That’s a lot of businesses preparing to batten down the hatches in case of a full recession.

Light at the End of the Tunnel

ThinkCast also talked about how it’s possible to come through these macroeconomic changes with careful business planning and focus on the right areas. Startups may need to think more innovatively about efficiency, maintaining their business culture and values, prioritizing digital marketing opportunities, and remaining flexible about remote workers.

Tech startups that can weather a potential recession and the associated risks can come out the other side much stronger, more resilient, and with a firm foundation for future growth. Companies that don’t have the staying power will either fold or be bought out by other, larger entities. This leaves the market less crowded, providing determined startups with far more opportunities to engage with potential investors.

Tech entrepreneurs could look to target clients in relatively recession-proof industries. For example, PropTech ventures will always be required, especially as more people tend to stay in rental properties during a recession rather than choosing to climb onto the property ladder. Creating a proposition to make life easier for landlords or tenants could be a winning move that continues to have an impact even when the economy enters a period of growth.

Final Word

Arch Collective has worked with dozens of early-stage tech startups, and we know exactly what sort of challenges you face day in and day out. Even during an optimal economic climate, it’s tricky to get your tech offering in front of investors who will be as passionate and excited about it as you are. Our experts can conduct a thorough audit of your marketing efforts, making sure your strategies are in line with your company goals and vision, and that you have the foundational framework to survive — and even thrive — through a period of recession. Book your 15-minute introductory call and ask about our marketing audit proposition, including how it could help you recession-proof your business and achieve sustainable, consistent growth.

Need more tech startup news and marketing strategy insights? Subscribe to Arch Collective's newsletter.