A bear market generally bears a bad reputation for being incredibly hostile to businesses, but it may also present exceptional opportunities to build sustainable businesses. Some of the biggest technology names were formed during challenging economic times: AirBnB (2008), Square (2009), Stripe (2009), Uber (2009), Adobe (1982), and Microsoft (1975), to name just a few.
Because unlike in a bull market, startup CEOs are not unduly preoccupied with team attrition or burning their capital to wrangle market share from competitors loaded with cash. In a bear market, founders can reorientate their team and focus on building a great company, a robust product, and a sustainable market position.
To help founders find the silver lining amidst the economic downturn, Fazz organized a fireside chat in partnership with Action Community for Entrepreneurship and JTC earlier last week.
At the fireside chat “Growing in a Bear Market” held by Fazz on September 9th, 2022; Hendra Kwik (Grop CEO of Fazz Financial Group), Tian Wei Liu (Group Deputy CEO of Fazz Financial Group), and Ying Lan Tan (Funding Managing partner Insignia Venture Partners) shared their perspectives of what founders should do to thrive in a bear market. Here is a recap of this insightful session, in case you’ve missed it!
1. Slow your burn rate
Be aware of your burn rate, especially if you have raised money in the past as it can serve as a potential red flag for future investors. Limit expansionary plans unless the return on capital warrants it. You will be judged by how you have used your money especially if it does not result in profitability.
To grow effectively in a bear market, one must fully evaluate the costs of acquiring more market share and compare and contrast each market opportunity over another to rank them not only in terms of potential upside, but also in terms of the costs to reach that upside.
2. Extend your runway
Having cash on hand beyond 12 months would be highly recommended, as this runway would allow your business to operate and survive past the bear market. Some of the startups we are working with set aside 10-20% of cash in a flexible business savings account to earn yield as an additional source of income. In addition, having at least 6 months’ worth of runway will also qualify startups for a credit line that helps to get them through the cash crunch period.
3. Trimming only reversible costs
Focus on trimming the costs that are reversible, without permanent impacts on your organizational structure —the machine that will continue driving your growth beyond the bear market.
- Reducing your marketing budget, for example, might be easier to implement than reducing operational costs.
- Freezing pay raises and cutting salaries are likely better alternatives than laying off employees.
Advice for Founders on Fund Raising in a Bear Market
Beyond survival, a startup that demonstrates the ability to stay lean and survive on its own through harsh economic environments is judged very favorably by VCs. Ultimately, investors want to know that a founder is committed to fiscal sustainability, ensuring the startup can be self-sufficient even in a bear market.
Optimize the bottom line
Investors will likely scrutinize your cash flow, profits, and loss more closely than in the past, and companies must be ready to show a clear path to profitability sooner than later. Apart from strong unit economics, startups that can demonstrate “stickiness”, strong retention rate and repeat purchase rate, will be favorably assessed by investors in this challenging economic climate.
Being innovative extends beyond product development. For example, resourceful founders could find opportunities to cut costs by adopting a globally distributed workforce without compromising the quality of talents. The founders with an indomitable spirit, who strike the right balance between innovations and fiscal efficiency, often get funded regardless of economic conditions.