A few months ago, it was predicted in a report that the world’s major economies might experience a recession shortly. Having said that, the US GDP is experiencing an annual fall of 1.6%. The constantly dropping GDP and economic contraction may lead to a recession within a short period of time. Generally speaking, a recession in a big market such as USA, would have a domino effect on global markets. It is likely that India may also have an impact as it has a huge dependence on global imports and exports.
Before we move further, let’s understand what exactly is Recession? Recession, simply put is a business cycle contraction due to a general decline in economic quantity. It is a time when there is reduction in liquidity and funds with individuals and businesses.
A crunch in liquidity has an immediate impact on business and investments, A lack of funds would mean people would spend led or refrain from investing, especially in long term investments. Also, downturn leads to reduced sales which will impact income of startups and eventually their profitably invariably impacting their valuation.
This would mean that investments in startups will suffer. The industry is already abuzz about a funding winter!
As a nation that is focussing on building startups, it begs an essential question, whether you as an investor should continue to invest in startups during a recession or not?
The question reminds me of a dialogue from the Oscar winning movie, The Schindler’s List, which goes as “Some people make money during peace, some make it in War”, It underlines the fact that an astute investor will always find an opportunity to invest and make money no matter what the economic situation is!
Think of this as an opportunity to find value buys in good startups, since valuations are low and a potential to multiply gains at exit.
However, investments though should never be made in a rush and due diligence should be carried out on the companies you chose to invest in. Although there is no ideal time to invest, you should look for investing in Recession-proof industries. For instance, a sharp-minded investor would better look forward to investing in industries catering to basic needs, such as Pharmacy, IT, EdTech, SaaS, etc as they have more chances to grow even during the low times.
Apart from needing to be cautious, recession can also help you make mindful investment decisions. Recession might work as a filter for you by separating the less competitive rivals of a startup. You can easily decide which startup shares are more affordable, reliable, and likely to gain profit in the long term. But when one considers a long-term investment approach, one should not completely ignore short-term investment.
The most significant thing to remember while investing in a startup is that you should never put all your capital and efforts into one startup or industry. Make sure you invest in a variety of industries in different sectors. For example, Pharmaceuticals are performing best nowadays and have greater opportunities to expand in the future given the deteriorating lifestyle and poor food habits of general people. Similarly, there is considerable interest in startups that are focusing on environmental solutions such as Electric Vehicles, Waste Disposal, Circular economy etc.
That’s why one must consider diversification when investing in a startup regardless of the time.
Another strong reason that might persuade one to invest in a startup during a recession is the history. If you look at the history of economic downturns, you will find that most of the unicorns were created during the downturn. Nothing can prove that this downturn is going to be any different. In fact, there is a possibility that you can become an investor of the next unicorn by making the right and mindful decision to invest.
Disclaimer: This article doesn’t give investment advice as our aim is only to make you aware of some fundamentals about investments. Kindly conduct your due diligence before making any investment decision.
