In the Startup world, the path to success is often painted with bold strokes of innovation, ambition, and resilience. But what happens when the tide turns and you find yourself navigating the challenging waters of a bear market? For Venture Capital (VC)-backed companies, raising capital in challenging market conditions presents unique challenges that require creative solutions to overcome.

Ongoing economic and regulatory uncertainty, interest rate hikes, contagion surrounding high-profile Silicon Valley-adjacent bank failures and general pessimistic economic outlooks are just some of the challenges facing the startup ecosystem in 2024. In a recent Ernst & Young report published July 27, 2023, VC investment dropped 34% from Q1 to Q2 and low IPO activity continues to hinder the late-stage market. The situation is so bad, some insiders are calling this an extinction-level event for startups. Yet, itis estimated that VCs and Private Equity firms are sitting on nearly $2trillion of dry powder. That means there is plenty of money to go around – the question is: How do startups get it?  

A Return to the Fundamentals

With access to capital restricted, startups and early-stage companies need to adjust to a new reality where “growth at all costs” no longer applies, funding rounds are declining, and investors are resistant to part with capital. Excess capital often allows companies to gloss over shaky foundations, cash-flow problems, lack of governance and no transparency. Essentially, to thrive in this environment, startups must get back to the fundamentals.

Here are the top 10 ways that Startup founders can stand out and get access to capital in the bear market.

(1)  Revisit your Business Model

Startups in the last bull market experienced unprecedented growth, which hid the also unprecedented inefficiencies, risks and unsustainable business practices. In a bear market, investors seek out businesses with robust value propositions and clear paths to profitability. Reassess your business model with a critical eye. Make necessary changes to ensure your business is sustainable, scalable, and adaptable to changing conditions. Long-term viability must be prioritized over growth at all costs.

(2)  Maintain a Lean Operation

Cash is king in a bear market. Prioritize managing your cash flow effectively. This may involve reducing unnecessary expenses, renegotiating contracts, and stretching your capital further. Even if you don’t think you’re in trouble in the short-term, we don’t know how long this bear market will last – build contingency plans and healthy runways. Investors will appreciate a lean operation that maximizes capital efficiency.

(3)  Focus on Customer Value

In uncertain times, customers seek value and reliability. Double down on understanding your customers’ needs and deliver exceptional value. Enhance your customer support and engagement strategies to foster loyalty and retention. Happy customers are loyal customers. Loyal customers mean robust paths to long-term viability for investors.

(4)  Diversify Revenue Streams & Investors

Over-reliance on a single revenue source can be risky. Consider diversifying your revenue streams to reduce vulnerability to market fluctuations. Explore new markets, partnerships, or product offerings that align with your core competencies.

On the flip side, over-reliance on a single investor can be just as risky. Consider reaching out to a broader range of investors, including corporate investors, family offices, and angel investors who may be more willing to take calculated risks.

(5)  Build Strong Relationships

Relationships with customers, suppliers, and partners are invaluable. Nurture these relationships by maintaining open communication and demonstrating reliability. Address problems when they arise, in a forthright way that establishes and strengthens trust between you and your network. Strong partnerships can provide stability in turbulent times.

(6)  Invest in Talent

Talented employees are assets, and their contributions become even more critical during challenging periods. Invest in training, development, and retention strategies to ensure you have a skilled and motivated team.

(7)  Bootstrapping and Bridge Financing

Higher interest rates translate to heftier monthly payments and less available cash flow. This financial burden may prolong the time needed to pay off loans and raising capital comes with higher targets that are harder to reach. Explore options for bridge financing or self-funding to sustain your operations while waiting for a more favorable fundraising environment.

(8)  Be Agile and Adaptable

Bear markets are unpredictable. Be prepared to adapt your strategy quickly in response to changing circumstances. Agile startups that can pivot and seize emerging opportunities often fare better. Craft a compelling narrative around your company’s resilience and adaptability. Show that you have contingency plans and a strategy for weathering economic downturns.

(9)  Seek Strategic Funding

While raising capital in a bear market can be challenging, consider seeking strategic investors who bring more than just financial support. Look for investors who can provide industry expertise, networks, and guidance to help you navigate the downturn.

(10) Stay Resilient and Optimistic

Maintain a positive outlook and instill resilience in your team. Embrace the challenges as opportunities to learn and grow. It’s often during adversity that startups discover their true strengths.

During a bear market, startups can find stability and growth by returning to the fundamentals that have always underpinned their success. These principles – sound business models, adaptability, and resilience – serve as a compass to guide startups through turbulent times. By staying true to these fundamentals, startups can not only survive but thrive in the face of adversity, emerging from the bear market stronger and more resilient than ever.

Erika Knierim is a startup and venture capital attorney based in Chicago, IL. She represents founders, startups and venture capital funds in a wide variety of corporate transactions, including raising capital and navigating issues associated with rapidly-growing startups. She can be reached at eknierim@founderslaw.com.

The opinions and recommendations expressed in this article are the opinions of the individual author and do not constitute legal advice or recommendations by Founders Law LLC. No attorney/client relationship or engagement is intended to be, or can be, created by the review of this content. Individualized advice can only be provided after a review of the circumstances of your business or matter.