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Markets are cyclical – they go back and forth 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 be the difference between thriving or struggling – preparation is key.
According this article in The Motley Fool, “Bear markets tend to last longer than corrections. The longest bear market for the S&P 500 occurred during the Great Depression and lasted 2.8 years. The dot. com burst and lasted 2.1 years. this Kiplinger article, “The average duration of a bear market is about 9.5 months and occurs, on average, about 3.5 years apart.”
Related: SPY: Bear market here we come?
Keeping the same trading strategies in place from a bull market to a bear market to grow at all costs can prove disastrous; not all markets are worth chasing in varying macro conditions. To grow effectively in tricky bear markets, one must fully assess the cost of acquiring more market share and compare and contrast each market opportunity against another to rank them not only in terms of upside potential, but also in terms of the cost to achieve this increase. . The investment of time, energy, capital and resources must be weighed more precisely when the risk premium (beta) of bear markets is in play.
In today’s turbulent, hyperinflated, and overall fragile economic and geopolitical environments, founders must build resilience, manage cash flow, and be ruthlessly vigilant about the most financially and operationally sound expansion plans.
You can close your doors quickly by growing too quickly. You may run out of cash, overextend your manufacturing and operating lines, and find yourself caught off guard by factors beyond your control (inflation, unforeseen blockages, shipping delays, unexpected cost increases, cooling market sentiment, etc.) .
Related: SPY: Is this the formation of a bear market?
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% cash in a business savings account as an interest-free line of credit, so to speak, in case of an unexpected cash shortage.
Have backup supply chain facilities/vendors in case your principal goes offline or faces unexpected delays.
Limit expansion plans unless the return on capital justifies it.
Reduce excessive SG&A (sales, general and administrative) expenses.
Optimize AOV (average order value) by grouping products to increase transactions (gross sales).
Manage with fewer resources (reduce “nice to have” perks such as offsite retreats, meals, travel, etc.)
Raise prices to fight inflation and rising cost of goods sold that compress gross margins.
Consider investing capital in long-term opportunities that could now be significantly discounted.
Amplify marketing only in the top three performing channels and reduce the rest.
Don’t raise outside capital in a “tour de table” and don’t reduce the valuation of your company. Instead, use higher cash flow and operating margins to generate 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 markets public. Keep in mind the impact of the current capital raising on your future share capital and stock option prices for your employees.
Related: SPY: Why the odds of a bear market are growing day by day
Bear markets historically last 9-18 months, so weathering the storm during this time is often justified. However, with the uncertainty of current global affairs, be prepared to alter this historical time horizon and plan your strategies accordingly to mitigate breakup risk.
In my opinion, the silver lining is that in bear markets, the most resilient and successful entrepreneurs are usually those who find their footing despite difficult market environments. Those who can manage their businesses extremely well today will soar rapidly when market conditions normalize tomorrow.
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