​Why a downturn can separate the recession-proof startups​ from the ‘hacks’

The inevitable physics of economics is upon us — what goes up must come down — and we appear to be headed for the down part of the equation.

But all is not lost. If you need a reminder, Venmo, Instagram, Uber and WhatsApp all launched during the Great Recession of 2008.

When I think about recessions, I remember what an electrician said while working on my house during the dot-com blowup. I’d asked him if he was worried about the economy affecting his work, and as he drilled another hole for the wiring, he looked up at me and said, “Nah. A bad economy just weeds out the hacks.”

If your company is lacking basic business fundamentals and burning cash, well, maybe you’re in for a reckoning. But then again, maybe you always were. But if you have a well-grounded startup built on a good idea with a solid foundation, you can probably ride out whatever storm is coming.

The question is this: Are you building something essential at the core of your customer’s business, which Operator Collective founder and CEO Mallun Yen refers to as painkillers? Or are you building something less essential, which she calls vitamins?

Painkillers versus vitamins

“Companies building painkillers rather than vitamins, especially solutions that are technically hard or tricky to develop, or anticipate fundamental but yet-to-be-mainstream shifts in an industry, are particularly well positioned to weather the macro conditions that are out of their control. Painkillers include products that increase revenue or significantly lower costs in a tangible way,” Yen told me.

She said those startups can be in any category as long as they are helping companies work smarter, which is even more essential in an uncertain economy.

“For instance, we have one company we are investing in that enables customers to significantly increase their sales by enabling them to do things in a way that hasn’t been done before. Another is materially lowering cloud infrastructure spend — a pain point that will only increase for companies across the board as more data is stored in the cloud and corresponding queries and other analysis need to be run.”

Derek Zanutto, general partner at CapitalG, said that while many companies will experience some short-term hiccups due to market fluctuations, his firm still expects to see many grow and thrive over the coming years.

“Some of the greatest companies have been founded or emerged stronger than ever during weakened market conditions. I’m particularly bullish on startups that are helping enterprises harness the power of their data. Data, when leveraged well, can help enterprises both rein in costs and generate more money, making it, over the long term, a recession-proof business sector,” Zanutto said.

Soma Somasegar, managing director at Madrona Ventures, said his firm has been investing in intelligent applications, adding that regardless of what’s happening in the macro environment, they are sticking to the plan.