When Kirk Hutchinson opened his startup business Power of the Almond, a keto and sugar and gluten-free bakery in November 2020, 60 count boxes of eggs still cost around $6, sugar substitutes were relatively cheap and the cost of his other ingredients was still reasonable in his opinion.

Now, that has all changed.

“It’s gotten to where who knows what the price of ingredients is going to be next week when I go to place an order with my distributor or what our sales will be like,” Hutchinson said. “One week we’ll have a ton of sales and the next week, we’ve got so much product that has to be returned. And then we have to pay the grocery store for that lost product. It’s just so unpredictable right now.”

To respond, Hutchinson is now moving more toward his wholesale customers like grocery stores and introducing a 9-percent price increase to match recent inflation rates.

Inflation, a volatile stock market and general economic uncertainty have all contributed to the startup environment. In the last year, federal interest rates have risen dramatically, with one key Federal Reserve rate jumping from 0.8 percent to 4.33 percent. The Consumer Sentiment Index, an indicator of the general public’s confidence in the economy hit a multi-year low in mid-2022 and has only improved slightly since.

These changes have affected the way business founders, mentors, teachers and investors are approaching startups.

Another company introducing change in response to the current economic climate is Glo, a light-up cube and toy business located in Downtown Starkville. Chief Executive Officer Hagan Walker and Vice President of Business Development Anna Barker said the company is still paying nearly double what it did for shipping and manufacturing today than it was in 2019. Within the last year, wholesale orders have also seen a slight downturn in major retailers like Kohls and Macy’s

“We’ve seen them on a situational case by case pull back on what their original order was or reduce on what they were originally bringing on for a holiday season all together or for a certain department,” Barker said. “That’s just being kind of slashed.”

The company is now looking to sell to distributors in countries not as affected by the high-interest rates in the USA, Walker said.

“We’ve already onboarded three new distributors in Canada, Australia, and actually one in Singapore,” Walker said. “What that allows us to do is sell products to other countries that might not be as affected as the US. And also you have to do less work when you sell to a distributor because they do all the work. So it’s a lower margin (cost), but much higher volume.”

How is the E-Center responding?
Mississippi State University’s Center for Entrepreneurship and Outreach is taking the changing economic environment into consideration when coaching the founders of startups.

When students come to the center with a startup idea, they can receive between $500 and $7,500 in funding from the E-Center by passing progress benchmarks determined at panel pitch events fashioned like the popular television show Shark Tank. Once students reach the fourth benchmark, they get connected with angel investors. Angel investors typically invest money in startups in exchange for a share of ownership in the company. That private money can be used to fund a business through the launch phase, Director of Outreach Jeffrey Rupp said.

One group of such investors is the Bulldog Angel Network, an investment club made up of angel investors who have ties to MSU. The network works with the MSU E-Center to help fund student, faculty and alumni startup businesses. The E-Center and BAN have invested a combined total of more than $5 million since 2017, E-Center Director of Entrepreneurship Eric Hill said. Typically 50 projects a year receive some type of funding.

Economic pressures have changed the messaging the E-Center and investors have for business students and startups, though.

“We have to prepare the teams to be realistic and understand that pitching today versus eight months ago is not the same,” Rupp said. “What we have to do is make them tougher. Their pitches have to be better, be airtight. Their financials absolutely have to be rock solid. Because when we have our pitches, which we do virtually, (investors) are going to ask harder questions. It’s going to be a harder sell.”

Earlier this year, one deal saw an angel investor pull back on their investment amount due to less growth in their overall portfolio.

“One of the investors backed off the funding he was going to put into that business because his investments aren’t ginning (growing) the way they were (before),” Rupp said. “So it is impactful in that way.”

Hill said part of his and Rupp’s responsibility is seeing business trends and advising students based on those observations. In the past 10 years, there has been a push toward monthly subscriptions and memberships for different products and services. Hill believes as fear of a recession sets in, people might be looking to cut some of those monthly expenses in exchange for an annual plan.

“I think there’s higher scrutiny on ‘what value am I getting for paying once a month,’” Hill said. “When I think of a recession, of how essential something is to somebody, I’m going to go look at my bill and say, ‘Do I need both Netflix and Hulu this month?’ Probably not. So I think with all monthly subscriptions in both software and hard goods, people look at that because it’s an easy bill to cut.”

He also noted that new startups should take advantage of technology such as artificial intelligence when they can, like ChatGPT, an AI that can speed up market research and develop speeches, business plans, payment modeling and even process data much faster than a human.

“In my opinion, that will transform everything,” Hill said. “The fact that I can get on there and say, ‘build me a landing page,’ which is something I once had to pay developers a couple of thousand dollars to do, is now basically free. So a business today that’s not considering the impact of AI in its business model is, in my opinion, doomed.”

How are investors looking at the situation?
Bulldog Angel Network president Wade Patterson says investment dollars for startups is far from drying up at the moment, but as federal interest rates rise and fear of a potential recession looms, some investors are becoming more conservative with the amounts they are willing to invest. And as companies take on increased costs of doing business, it becomes more important than ever to have a plan in place.

“I can detect a little bit more conservatism and the amounts they’re willing to risk on these investments,” Patterson said. “It’s been manifested mostly in much more detailed questions about the startups’ ability to withstand recession and interest rates more than it is about reluctance to invest.”

Now more than ever, investors in the network are interested in companies that can withstand a recession or pandemic. For example, startups focusing on home goods or businesses making other businesses’ operations easier and more affordable are viewed as more stable, Patterson said.

“People are a lot more at home today than they are in the office,” Patterson said. “We’re just finishing a deal right now that’s a good recession-proof business that uses the cloud to hire people. It makes taking a job as easy as buying something on Amazon. Instead of going through all the different processes and tubes you have to jump, they’ve got a way of making it much easier to do. We see that as a really great recession-proof kind of play. They can save almost 10 times the cost of hiring. It also cuts back on the time internal employees have to spend on hiring. So it’s a huge all-around savings, and those kinds of businesses can be great investments as you go into recession.”

Patterson also said as businesses face the challenge of the increased cost of operation across the board, they could seek further investment. As federal interest rates rise, investors could raise their own rates for the funds invested.

“The cost of that follow-up money is going up,” Patterson said. “At the same time, these business startups have to pay more for everything. All their expenses are going up because of the inflation that’s going on around the country. So it’s kind of a double whammy.”

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