How can your company thrive in a bear market?
Opinions expressed by entrepreneur The shareholders themselves.
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, the way we prepare our startups and our businesses for another potential bear market can mean the difference between thriving or struggling – Preparation is the key.
According to 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. Since the 1950s, the longest bear market has been as early as the 2000s. twenty when the dot.com bubble burst and lasted 2.1 years.” According to this Kiplinger article, “A bear market averages about 9.5 months in length and occurs, on average, about 3.5 years apart from each other.”
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Keeping the same business strategies in place from a bull market to a bear market to grow at any cost can be disastrous; Not all markets are worth pursuing under varying macro conditions. To effectively grow in challenging bear markets, one must fully assess the cost of acquiring more market share and compare and contrast each market opportunity with another to rank it not only in terms of potential upside, but also in terms of cost to reach that uptrend. The investment of time, energy, capital and resources must be balanced more when the risk premium (beta) of bear markets is in play.
In today’s turbulent, inflated, and fragile global economic and geopolitical environments, founders must build resilience and manage cash flow, and be ruthlessly vigilant about the most financially and operationally sensible expansion plans to pursue.
You can get out of business quickly by expanding very quickly. You may run out of cash, over-extend your manufacturing and operating lines, and find yourself surprised by factors outside your control (inflation, unexpected shutdowns, shipping delays, unexpected cost hikes, cooling market sentiment, etc.).
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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 an unexpected liquidity crunch.
Have backup facilities/suppliers for the supply chain in case your primary connection is interrupted or you encounter unexpected delays.
Limit expansion plans unless the return on capital guarantees it.
Reducing the excess general and administrative expenses (selling, general and administrative).
Optimize your AOV (Average Order Value) by grouping products together to increase transactions (Total Sales).
Managing with fewer resources (reduce ‘good to have’ perks such as outdoor retreats, meals, travel, etc.)
Raising prices to fight inflation and the rising cost of goods sold that put pressure on gross margins.
Consider investing capital in long-term opportunities that may now be discounted significantly.
Amplify the marketing in your top three performing channels and cut the rest.
Don’t raise outside capital in a “low 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 getting higher with higher interest rates, and the cost of raising investment capital will require a higher proportion of equity at a lower valuation due to public market firms. Consider how the capital increase now will affect the future stock position and stock option prices of your employees.
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Historically, bear markets last 9-18 months, so weathering the storm for that period of time is often justified. However, with the uncertainty about current world affairs, be prepared to change this historical time horizon and plan your strategies accordingly to mitigate the risks of decay.
In my opinion, the bright side is that in bear markets, it is usually the most resilient and successful entrepreneurs who find their footing despite challenging market environments. Those who can run their business very well today will rise very quickly when market conditions return to normal tomorrow.
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