How Your Business Can Thrive in a Bear Market
In today's turbulent, hyper-inflated and globally-fragile environments, founders must build resiliency, manage cash flow and be ruthlessly vigilant as to which expansionary plans make the most financial and operational sense to pursue.
Markets are cyclical — they ebb and flow from bullish to bearish, only to repeat the same cycle over and over again. As they say, history repeats itself. So, how we prepare our startups and businesses for another potential bear market can mean the difference between thriving or struggling — preparation is key.
According to this article in The Motley Fool, "Bear markets tend to last longer than corrections do. The longest bear market for the S&P 500 occurred during the Great Depression and lasted 2.8 years. Since the 1950s, the longest bear market was in the early 2000s when the dot.com bubble burst. It lasted 2.1 years." According to this Kiplinger article, "The average length of a bear market is around 9.5 months and occurs, on average, around 3.5 years apart from each other."
Related: SPY: Bear Market Here We Come?
Keeping the same business strategies in place from a bull market to a bear market to grow at any cost can prove disastrous; not all markets are worth pursuing under varying macro conditions. To grow effectively in tricky bear markets, one must fully evaluate the cost 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 cost to reach that upside. The investment of time, energy, capital and resources must be weighed more keenly when the risk premium (beta) of bear markets is in play.
In today's turbulent, hyper-inflated and globally-fragile economic and geopolitical environments, founders must build resilience, manage cash flow, and be ruthlessly vigilant as to which expansionary plans make the most financial and operational sense to pursue.
You can go out of business quickly by expanding too quickly. You can run out of cash, over-extend your manufacturing and operational lines, and find you're caught off guard by factors outside of your control (inflation, unforeseen lockdowns, shipping delays, unexpected rising costs, cooling market sentiment, etc.).
Here are 10 growth strategies to consider in a Bear Market:
Have a contingency plan for cash reserves. I like to have at least 5%-10% of cash in a business savings account as an interest-free line of credit, so to speak, for unforeseen cash crunches.
Have backup supply chain facilities/suppliers in case your primary one goes offline or faces unexpected delays.
Limit expansionary plans unless the return on capital warrants it.
Cut excess SG&A (selling, general & administrative) expenses.
Optimize AOV (average order value) by bundling products together to raise transactions (gross sales).
Manage with fewer resources (cut "nice to have" perks such as offsite retreats, meals, travel, etc.)
Raise prices to fight inflation and the rising cost of goods sold that squeeze gross margins.
Consider investing capital in long-term opportunities that might now be discounted significantly.
Amplify marketing in only the top three performing channels and cut the rest.
Don't raise outside capital at a "down round" and lower your company's valuation. Instead, use cash flow and higher operating margins to produce the working capital you need. Today, the cost of borrowing from banks is higher with rising interest rates, and the cost of raising venture capital will require a higher percentage of equity at a lower valuation due to public market comps. Be mindful of how raising capital now will impact your future equity position and stock option prices for your employees.
Bear markets historically last 9-18 months, so weathering the storm for that period of time is oftentimes warranted. However, with the uncertainty of current global affairs, be ready to alter that historical time horizon and plan your strategies accordingly to mitigate the risk of dissolution.
In my opinion, the silver lining is that in bear markets, the most resilient, successful entrepreneurs usually are the ones who find their footing despite challenging market environments. Those who can manage their businesses exceedingly well today will soar rapidly when market conditions normalize tomorrow.
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