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How To Navigate A Startup In A Bear Market
- Published December 14, 2022 5:43AM UTC
- Publisher Osama Hassan
- Categories Capital Raising Tips
As the market nosedives, Justin Kahl and David George go beyond the general advice of conserving cash, extending runway, shifting focus from growth to efficiency, and provide a diagnostic framework for startups to navigate market uncertainty and downturns.
STEP ONE: Reevaluate your valuation
Your valuation multiple is the ratio of your valuation to revenue.
You can get a rough estimate for the change in your valuation by looking at leading public companies in your sector
If they’re down 60% there’s a good chance that you’re in a similar position
Once you have an idea of how much your market segment has dipped, recalibrate your goals for the new lower valuation
Estimate change in valuation, add growth and efficiency adjusted premium, calculate new ARR, hit this new target with 12 months of runway – you’ll be in a good position for your next raise
STEP TWO: Understand your burn multiples
Your burn multiple is cash burned divided by net ARR added
If a company has a burn multiple of 4x, it is burning $40M to add $10M
Tracking this multiple helps you stay on track – measure it every quarter
STEP THREE: Build scenario plans.
Burn multiples and valuation multiples tell you how efficiently and how much you need to grow
However, as the fundraising environment changes, you have to watch your cash balance very carefully
At minimum, plan for these 3 scenarios:
i) Base case – 80% confidence plan that you can hit this goal
ii) Best case – ARR and burn rate is likely at or better than your operating plan from two quarters ago
iii) Worst case: you need to slow burn significantly and lengthen your runway
UPSHOT: Though it’s important to remember that markets are cyclical and downturns come with a silver lining. Some of the strongest businesses are forged in the toughest times, and often, those that survive when the market turns are rewarded with increased market share and leaner, more efficient operations.
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