Funding in a bear market entails a focus shift from hype to the hard facts of business. According to Crunchbase statistics, North American venture investments declined by 37 per cent in 2023.
This can be attributed to wariness in general. During this period, investors remain vigilant around startups. Despite still having money to invest, there is now a push towards resilient businesses with models and growth trajectories.
Similarly, as noted by an investor, Trace Cohen, an economic downturn sees investors “…investors…are on the lookout for resilient companies that can weather economic downturns”.
In essence, investors today prefer startups whose profitability prospects, revenues, and capital plans are compelling for funding, which are companies that will thrive even when economies are stagnant or dropping.
Back to fundamentals: Profit and revenue growth
For instance, whereas in a bull market, investors were mainly seeking growth, and growth only, in a bear market, no matter how good a growth prospect is, it is not enough for profitability, and good business models are the key. Indeed, as one analysis points out, VCs have “put[ a] laser focus on profitability and the sustainability of startup business models when making investments”.
The importance of profitability is further underscored by Erika Knierim, startup attorney, as she says, “In a bear market, investors seek out businesses with robust value propositions and clear paths to profitability”.
In other words, will this startup actually survive or even prosper without its limitless access to investment dollars? Founders should emphasise their actual revenue earned. No more impressing with meaningless metrics like “users” or huge numbers thereof.
Pitch decks now must demonstrate “How do you make money? And why will people pay you for it?” Investors will be looking at current or near-future revenue generation and strong profit margins. In down markets, “cash is king.” Firms with more cash and greater runway demonstrate better financial management.
Capital efficiency and runway
Closely related to this is capital efficiency. Investors these days ask startups to make every dollar count. “Investors favour capital-efficient companies,” says venture advisor Lance Cottrell, because any startup that burns huge amounts of money before reaching market may die if more funding dries up. In a bear market, VCs expect longer runways, often 24 to 36 months of cash, to avoid raising in a down cycle.
This forces founders to either raise more money at the cost of diluted equity or cut expenses and growth plans. Investors reward startups that can do more with less, such as outsourcing production or focusing on minimum viable features.
As Knierim puts it: “Cash is king in a bear market…Investors will appreciate a lean operation that maximises capital efficiency”.
Also Read: Seizing opportunities: Accelerators as a strategic choice in bear markets
Revenue traction and growth metrics
Of course, profitability is important, but there is also growth momentum. So, investors will be interested to know that a startup’s product is gaining traction and users at a good rate.
However, unlike earlier, today there is a need to demonstrate this growth momentum through financial metrics. For example, revenue growth rate, retention, etc., are some of the aspects that VC investors focus on.
Within pitches, it seems that slide decks have become slightly less detailed, particularly when it comes to a now-at-times included mini “why now” market section, as TechCrunch has reported that entrepreneurship has shifted focus to time and traction for attracting investors.
Within industries that are currently favourable, pitches for startups within categories such as AI, fintech, and climate technology can use the support that comes from being within a popular sector. However, within such an industry, investors still expect to see data: “Many seed-stage startups…raise capital by reaching out to fewer than 50 investors.”
Strong team and execution ability
Investors will naturally look at the team; in a bear market, the founding team may be the deciding factor. VCs will take more risk in a bear market, but value experience in the founding team in terms of execution or in the field when the risk is higher in a bear market. The VCs will ask hard questions about the founding team and the way the company has advanced. Cottrell believes founders should welcome those hard questions.
The fact that one has the right calibre of staff and mentors helps reduce uncertainty among investors. Furthermore, being able to demonstrate your startup skills, like being able to pivot or reduce costs while keeping the company alive, helps.
As one expert says, “VCs are looking more and more for companies ‘built to last’ with strong balance sheets and contingency plans. If your team can confidently communicate their milestones, spend, and projections, this helps build trust.”
Market opportunity and differentiation
Even in a market downturn, market opportunity does matter. Investors fund only startups that solve pressing problems or have an advantage over their peers. During periods of scarce funding, competitive differentiation, technology, partnership, or focus on a niche becomes critical.
For instance, focusing on a specialised market segment today can help a pitch stand out in a crowd. Startups with unique IP, regulatory barriers, or locked-in customer contracts could justify valuations even in a bear market.
Also Read: Thriving when markets tank: Strategic lessons from history’s bear cycles
Importantly, investors assess the size of the addressable market differently now: they prefer defensible markets over just big ones. A large but fractured market may be less attractive than a small market that a startup can dominate. As one VC advises, “be very clear on your end-user and why they will pay now”.
Realistic valuations and terms
Overall, valuations are generally lower during a bear market, and terms are tougher. Founders can expect more serious due diligence and a term sheet reflecting the situation at this point in time.
According to Moonfare’s analysis, startups are often facing “down rounds” and more burdensome deal terms in this environment; investors may demand board seats or liquidation preferences and pay-to-play provisions.
While this might be painful for founders, taking a fair valuation now can preserve more equity in the long run. The key is pricing to market reality. As Robin Guo said, “Don’t raise based on ego, raise based on reality“. Set a pre-money valuation that reflects recent deals and your traction. An investor-friendly cap table today can pay dividends later when the markets recover.
Adapting fundraising strategy
Even startups must make some changes in their way of seeking funding. In an economic slowdown, it will take longer to raise the next round of funding. Hence, startups should focus on building relations. To do this, startups should reach out to investors frequently but briefly, attend every possible meeting in person, and reach out to a wider set of investors.
The founders should also consider alternative financing options, which include grants, as well as corporate investment or bootstrapping in extreme cases. As a matter of fact, every founder needs a ‘plan B’ for accessing funds.
As a seasoned entrepreneur states: “During difficult times, I am far more likely to invest in a company that will use my money to grow rather than one that uses it just to survive”. In simpler words, explain how you plan to use the finances for accelerating growth, as opposed to mere survival.
Conclusion
Funding is not easy in a bear market, although some startup opportunities will emerge depending on how well they fit into the new criteria set by investors. While a bear market is characterised as conservative, startups that offer value and cost efficiency, and have shown how returns can be achieved, will impress investors.
We’ve already learned that, for funders, the same basic principles that are important across any given market have now become non-negotiable. By focusing pitches around profitability, traction, and growth, founders signal that they get it. Ultimately, by doing so, they ensure that they will not only make it through this bear market but also come out even stronger when better times return.
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