Top tips for startups during an economic downturn

In 2025, startups and digital native enterprises are navigating a complex economic landscape marked by cautious investor sentiment, rising operational costs, and the imperative to adjust their operations for a new AI-driven technology landscape. Here’s the current economic reality startups are facing:

• In the first quarter of 2025, there were only 3,155 venture capital deals in North America, compared to 4,282 deals in the same quarter of 2024. This is roughly a 26% decline in deal volume year-over-year.

• Borrowing costs have surged to the highest levels in nearly two decades. The Federal Reserve’s benchmark federal funds rate is hovering around 4.25% to 4.50% in 2025, which is the highest it’s been since 2007.

• New import tariffs in 2025 are straining businesses and consumers, dampening economic outlook. The U.S. implemented broad new tariffs on foreign goods, including a baseline 10% duty on imports from any country with a trade surplus with the U.S.

• Financial markets have turned volatile and downward, reflecting recession fears. In early April 2025, U.S. stocks suffered a sudden plunge of about 10.5% over just two trading days after a new round of tariffs was announced.

In order to set themselves up for success during times of economic uncertainty, businesses should take steps to ensure their costs are controlled and predictable, their operations are set up for maximum efficiency, and their teams feel supported. One key area for review is cloud costs, which can balloon if they aren’t managed closely, and are often ripe for optimization. In this article we outline advice for navigating an economic downturn and controlling your cloud costs.

1. Control your cash burn and prioritize free cash flow

Controlling cash burn and managing your cash flow is critical in a time when customer growth may slow and fundraising is likely to become more difficult. By focusing on generating positive cash flow, startups can reduce dependency on external capital and gain greater control over their growth trajectories. This financial autonomy is particularly valuable during economic downturns when venture capital funding may be limited, and can prevent startups from having to resort to raising money with unfavorable terms. If you do need to raise money during a downturn, prioritize a clean term sheet, even if that means raising at a lower valuation. While startups often want to avoid a ‘down round’, raising money with poor terms is a bad long-term outcome for the business.

Tips to control cash burn include:

• Examine software spend and renegotiate vendor contracts: Many companies spend on software tools that are expensive and sometimes duplicative. Closely review your monthly and annual software subscriptions, reduce where possible, and see if you can renegotiate costs on necessary software.

• Examine the Return on Investment of all activities: Closely monitor the ROI of activities to ensure you’re getting the most out of your spending on advertising, events, and other activities.

• Focus on essential hiring only: Hiring represents not just an immediate cost but a significant long-term financial commitment including salary, benefits, and equipment. During uncertain times, limit recruiting to revenue-generating or mission-critical positions while placing “nice-to-have” roles on hold until economic conditions improve.

2. Use AI tools to increase efficiency

AI adoption has shifted from a competitive advantage to a baseline expectation. For startups looking to maximize efficiency, AI tools offer a powerful way to automate, scale, and streamline certain tasks without expanding headcount. According to our 2025 Currents research report, 79% of respondents are already using AI in some way, with most prioritizing internal process improvements (26%) and product enhancement (25%).

Some of the most effective ways startups are using AI to increase efficiency include:

• Automated customer support: Tools like Intercom Fin or Zendesk AI reduce the need for large support teams by instantly resolving common issues with natural language responses.

• AI-Powered marketing and content creation: AI writing tools like Jasper and Copy.ai generate blogs, ad copy, and email sequences—freeing up marketers for higher-level strategy.

• Coding assistance: AI coding tools like GitHub Copilot and Replit AI accelerate engineering output by suggesting or writing boilerplate code, tests, and documentation.

• AI for data analysis: AI visualization tools can give teams clear pictures of complex datasets. Tools like Tableau, PowerBI, and other AI-integrated dashboards help teams analyze customer behavior, forecast demand, or generate performance summaries.

By thoughtfully integrating these tools, startups can cut operational costs, reduce the need for large functional teams, and focus talent on high-leverage strategic work. For those looking to get started with the basics, think about how ChatGPT productivity hacks can help you and look into AI certifications. To get more deep into the power of generative AI, DigitalOcean’s GenAI platform is an easy-to-use, cost-effective platform for getting started with agentic AI and can be used for a variety of use cases, from support ticket triage to HR knowledge.

3. Keep a clear focus on customer needs

Despite the stress that startups may experience during a downturn, learning to get back to basics can be a good practice. Companies that can bring their employees together and focus on building for current customers will be set up for success in the future. Some tips include:

• Double down on customer needs: When new customer acquisition becomes less certain, focusing on user retention strategies is critical. Aim to retain and grow existing customers and maintain a strong Net Promoter Score and Net Dollar Retention rate by focusing on existing customer requests over flashy new features, ensuring your current customer experience is strong.

• Get creative with marketing and sales tactics: It’s easy to overspend on marketing ideas and sales tactics in times of strong financial growth. Identify creative marketing strategies to reach your Ideal Customer Profile and show them how your product will provide them value during a potential downturn.

4. Optimize your cloud infrastructure for cost efficiency

Cloud services are a significant expense for startups and digital native enterprises who rely on cloud infrastructure to host their applications and other mission-critical services. The Total Cost of Ownership (TCO) of cloud services can be high when taking into account additional costs including bandwidth, and support. In addition, the complexity that is associated with hyperscaler clouds often requires dedicated team members to manage infrastructure. Some tips to optimize your cloud infrastructure include:

• Regularly examine your cloud bill: Ensure you understand your cloud bill and what the different charges mean. Keep a close eye on data egress costs, which can add up quickly especially on providers like AWS.

• Adopt managed services: Utilize managed databases and Kubernetes to reduce maintenance overhead and operational costs.

• Choose transparent pricing models: Select a cloud provider that offers clear, predictable pricing to avoid unexpected cloud bill shock.

• Cloud cost optimization strategies: Right-sizing ensures resources match actual workload demands, while spot instances deliver significant savings for non-critical workloads that can tolerate interruptions.

DigitalOcean provides transparent pricing, generous bandwidth allowances, and cost-effective solutions tailored for startups and digital native enterprises, helping them manage cloud expenses more predictably.

5. Build flexible systems that can adapt as needed

Future growth can be hard to predict during a downturn, so companies must build systems that are adaptable to changing demand rather than locking themselves into costs they cannot change. This principle applies to a range of costs, from cloud computing to marketing and sales spending.

• Monitor resource usage: Regularly assess cloud resource utilization to identify and eliminate waste. Use cloud monitoring tools to identify servers that aren’t being used. Leveraging tools such as DigitalOcean Kubernetes can help you scale up and down dynamically as your resource usage changes.

• Iterate quickly: Use agile methodologies to adapt swiftly to market changes and customer feedback. For example, if you’re a B2B marketing automation startup, conduct bi-weekly sprint reviews with actual customers to prioritize features that directly address their pain points.

• Invest in making your workloads elastic: Overspending on static infrastructure costs, whether on premises or in the cloud, isn’t ideal when you can’t predict customer demand. Prioritize optimizing your costs with technologies like serverless and event-driven architecture that enable elastic scale.

Startup tips economic downturn FAQ

How can startups control their cash burn during an economic downturn?

Startups should examine software spend, renegotiate vendor contracts, and focus only on essential hiring to reduce cash burn. Generating positive cash flow reduces dependency on external capital and gives startups greater control over their growth trajectory during uncertain times.

What role can AI tools play in helping startups increase efficiency?

AI tools can automate customer support, assist with content creation, accelerate coding processes, and provide data analysis without expanding headcount. Thoughtfully integrating these tools allows startups to cut operational costs, reduce the need for large functional teams, and focus talent on high-leverage strategic work.

Why is cloud cost optimization important during economic uncertainty?

Cloud services represent a significant expense for digital native enterprises, with costs including bandwidth, support, and often dedicated team members to manage complex infrastructure. Regular examination of cloud bills, adoption of managed services, and choosing providers with transparent pricing models can help startups reduce and predict their cloud expenses.

What should startups prioritize regarding customers during a downturn?

When new customer acquisition becomes more difficult, startups should focus on retaining and growing existing customers by addressing their specific needs and maintaining strong Net Promoter Scores. Companies that bring their employees together to focus on building for current customers rather than pursuing flashy new features will be better positioned for future success.

References

• Currents Research - February 2025

• 2025 stock market crash

• US starts collecting Trump’s 10% tariff, smashing global trade norms

• Fed skips another interest rate cut, warns of ‘potential’ for stagflation

• Q1 2025 global VC investment deals and deal amounts take a dip versus a year ago

DigitalOcean is the cloud for startups and digital native enterprises

As startups and digital native enterprises face the challenges of 2025, success hinges on financial prudence, the strategic use of AI, and careful selection of cloud services. By focusing on free cash flow, leveraging AI for efficiency, optimizing cloud infrastructure, choosing transparent cloud providers like DigitalOcean, and maintaining lean operations, startups can navigate economic uncertainties and position themselves for sustainable growth.

Here are some of the unique benefits DigitalOcean offers that can help businesses optimize their costs and increase efficiency:

• Flexible and scalable cloud infrastructure. Build and scale your applications with our complete suite of infrastructure products including Droplets, Managed Databases, App Platform, Kubernetes, Spaces, Load Balancers, and Firewalls—all integrated within a unified platform.

• Cutting-edge AI/ML capabilities. Access high-performance GPU Droplets for machine learning workloads, build custom AI agents with our GenAI Platform featuring RAG capabilities, function calling, agent routing, and customizable security guardrails, and deploy pre-trained models instantly with 1-Click Hugging Face integration.

• Transparent pricing and cost-efficient offerings. Compared to major cloud service providers, DigitalOcean offers a simplified pricing structure, helping you predict your expenses and manage your budget more effectively.

• User-friendly interface. Navigate your entire cloud infrastructure from a single view with DigitalOcean’s intuitive Control Panel Dashboard, eliminating the need to switch between sections while maintaining the simplicity that developers value.

• Robust security. Take advantage of advanced security features and protocols that can help protect your business from potential threats.

• 24/7 support and comprehensive documentation. Get round-the-clock customer support to address your technical queries and concerns. For further learning and understanding, you can explore our extensive library of documentation, tutorials, and community resources.

• Global performance optimization. Deploy across multiple regions worldwide for reduced latency, increased redundancy, and improved user experience regardless of geographic location.

• Migration support. Work with DigitalOcean’s network cloud migration partners like CTO.ai, Slower.ai, Crafty Penguins, Stack, Webbar, and GlobalDots for your cloud transition. These partners can provide you with the tools and expertise necessary to migrate your cloud infrastructure successfully.