July 7, 2022

In the worst of times we can seize the best opportunities

The last decade has been a decidedly chaotic time for capital raising. In 2008, the US started maintaining low interest rates, which resulted in the injection of cheap capital into the market. Both listed companies and startups watched their valuations rise steadily – if we look at it from Buffett Indicator, the numbers soared from 60% in 2008 to 200%. 

Then Covid hit in 2020, and the US government elected to print more money to prop up the market, which increased the amount of funds flowing into early-stage startups. Global venture capital investment in 2021 exceeded $620 billion, with an annual growth rate of 110%.
However, when the monetary policies of the last few years finally triggered super high inflation, the Fed announced rate hikes and shrinking balance sheets, at which point it became clear that capital would no longer be so cheap.  As public companies watched their market valuation be continually downgraded, early-stage startups became nervous in kind.  

My friends, the question is already not whether a bear market is coming, but how to survive when it does. 

A bunch of leading VCs and accelerators like Sequoia Capital and Y Combinator have already shared countermeasures for startups to survive the harsh bear market winter, such as tightening the reins on cash flow and speeding up fundraising.  

My viewpoint? When the valuation of public companies drops, mid to late-stage startups and VCs are the most impacted, because it becomes much harder to launch an IPO. Conversely, early-stage startups and investors will experience less discomfort.  However, VCs will undoubtedly become more cautious about each investment, leading to lower fundraising results and lower valuations than we would see during a bull market. 

Startups absolutely need capital injection to scale quickly – however, I don’t qualify “on paper” financing figures and market valuation as the main indicators of success. The true measures of success are finding your PMF (Product-Market Fit) and a sustainable business model.

Remember, there have been tons of startups that had a huge amount of financing and still tanked! Borrowing from my own experience, startups I’ve worked with such as Tian Ge Interactive, 91App, and Padlet all had reasonably low capital but still succeeded. 

Early-stage startups are sure to feel more cash pressure during a bear market. But let’s look at a few positive angles: we see a lot less cash-burning marketing subsidies creating fake demand and excessive competition. Facing a bear market also gives early-stage startups a compelling reason to reexamine their PMF, set priorities for their capital spend, and to reengage with users.  

Take it from me, if a startup team can lay the groundwork for a good company with real users during a bear market, they will be unstoppable when the market recovers. 

Let’s also not ignore the fact that there have been plenty of companies that came out of a bear market stronger than they went in. As a VC, we are always on the hunt for those exceptional founders that can raise their company above the chaos and uncertainty of the market.  

At Cherubic Ventures, we hold fast to the idea no matter how the economic terrain changes, we can always find those envelope-pushing founders that are committed to releasing our potential for creating a better world. Let’s work together to always seize the best opportunities during the most challenging times!

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