A framework for navigating bear markets

The market has experienced a downturn, and every blog or tweet storm seems to offer the same general advice: conserve cash, extend the runway, and shift from a focus on growth to one on efficiency. We’ve advised many later-stage growth companies through the ups and downs of the market, and we’ve realized that when the market is down, founders crave advice that goes beyond cliché and provides a concrete framework for determining how much to change in valuations and what it means for their next ride and charting their course for the future.

In this post, we go through the diagnostic framework we use when we sit down with the founders: reevaluating your assessment, understanding burn complications, and building scenario plans.

Reevaluate your rating

We start by identifying how the valuation multiplier changes (your valuation multiplier is the valuation-to-revenue ratio). Here, public markets provide the best basis for recalibrating private growth valuations because public markets tend to see the effects of lower valuations first. For example, in the current market (as the chart below shows), average ratings for public company software have fallen from 12 times for forward revenue to 5 times or less since high levels in October 2021, which is a drop of nearly 60%. The same goes for fintechs and consumer internet companies, which are also down by more than 70-80%.

However, the impact on project markets won’t be apparent until the data for the coming months and quarters is filtered, and even then, many of the deals announced in the second quarter will likely be priced into the first. In other words, it may take more than 6 months before we see the impact of the general market downturn on project financing.

Recessions have hit different sectors differently, which makes it important to look at relevant public companies to determine the best measure of where you are. For example, a year ago, it was common to see financing valuations for late-stage private companies that were 100 times the ARR (equivalent to running rate of revenue). If you did your last round at $20M, up 3X, you might have raised at a $2B valuation.

But things look very different now. You can get a rough estimate of the change in your assessment by looking at the leading public companies in your sector. If they’re down 60%, there’s a good chance you’re in a similar situation. When looking at high-growth public software companies, you’ll want to compare your ARR to their revenue valuation multiples due to their availability as a GAAP accounting metric.

Once you have an idea of ​​how much to drop in your market segment, how can you reset your goals for this new low valuation environment?

A useful exercise is knowing which ARR you need to reach to get back to the last round assessment and plan accordingly. To do this, use the estimated change in valuation multiples from the leading public companies in your space and add an adjusted growth and efficiency premium for faster growth. Then use this number to calculate the ARR you want to access. Your goal should be to achieve this revenue target within at least 12 months of the runway. If you can do this, you will be in a strong position to increase the next round of funding. A capital increase in less than 12 months sends a negative signal to the market and makes it difficult to get quality financing.

Continuing with our example, a $20 million ARR activity that was recently raised at $2 billion might note the leading public companies trading in the space with a 10x return, instead of 100x. To adapt to a startup’s faster growth pace, for public companies, let’s say a 15x inverse growth rate is a reasonable assessment of its next round of financing. (Note: 15x ARR is a 50% premium for the leaders in their sector and 200% a premium over the 5x program average, but the appropriate multiplier will vary for different companies.) This means that their goal should be to reach $133 million in ARR, or $2 billion divided by 15x, with 12 months of runway.

Take control of your burn [Multiples]

Now that you have a target ARR, how do you assess whether your business is growing efficiently to reach it? Here we turn our focus to burn complications, which we define as burnt money divided by net added ARR. For example, if a company is burning $40 million to add $10 million in ARR, it will have a copy multiplier of $40 million/10 million, or 4.0x. Burn complications are a metric you can assess every three months, and keeping track of them closely can ensure you stay on the plan.

We like burning multiples more than other efficiency metrics to re-calibrate when market conditions change because it encompasses all of your business activities. Unlike other competency degrees (eg, LTV/CAC) that focus only on sales and marketing, the actions you take in each business function will impact your multiple burn. As it all includes, well it looks different at different stages – a company with $5 million in ARR will have much less operating leverage than a $100 million company in ARR. You should notice a decrease over time with the goal of going above zero as the company becomes cash flow positive.

We looked at the burn-in multiples of private companies at different stages of growth to come up with some general guidelines for what a good and not-so-good burn during expansion looks like.

Copying multiple metrics by ARR

These metrics are a useful starting point for businesses at different stages, but you should never overstep your business constraints. If you need to add $100M of ARR with $50M of burn, you must create a plan to make sure the burn multiplier is less than 0.5x. If your multiplier burn isn’t where you want it to be, there are many ways to improve your multiplier burn to grow more efficiently, including scaling the right size for different jobs, improve margins, or lower CAC. In this article, we’ll continue to focus on our diagnostic framework, but we’ve already covered how to use Your financial data To overcome market turmoil.

Scenario plans

The burn multiples and the rating multiples tell you how efficient and how much growth you need, respectively. However, as the fundraising environment changes and access to capital becomes more opaque and more expensive, you must also carefully monitor your cash balance and manage your runway. Scenario planning is useful for looking at how macro events — wars, supply chain issues, and inflation — affect performance measures, such as growth and CAC. Closely monitoring cash spending and having scenario plans in place will enable you to quickly adjust spending and investment in response to performance.

At a minimum, we recommend planning for the following three scenarios:

  1. base case: An 80% confidence plan that you know you can achieve with multiple efficiency. In response, you slow down or lock up on your customer acquisition and operating expense (opex) investment. Revenue growth will be lower than your 6 month operating plan, but you will improve efficiency and an absolute cash burn.
  2. best case: Your ARR will likely be at or better than your six-month operating plan. You grow very efficiently, do not anticipate runway concerns, and can increase investments in operations and customer acquisitions.
  3. Worst case: You need to significantly slow down the burn and lengthen your runway. You plan to grow your ARR at the level you know it exists, even if you significantly reduce sales/marketing spending. You may need to reduce opex, including staffing, to survive.
Planning scenario in a bear market

Once you have these plans in place, evaluate your position on a quarterly or monthly basis, and then adjust your spending and hiring accordingly. While hopefully you’re heading towards the best case scenario, if you find that you are heading towards the worst case scenario there will likely be difficult decisions to make – do you need to layoffs? do you need raise debt or a round bottom? There is no one-size-fits-all answer to these questions, and if you find yourself experiencing them, it’s time to turn to consultants who know your business best and can help you chart a course for survival.

With market uncertainty and downturns, it is important to remember that markets are cyclical and that downturns come with a positive side. Some of the strongest companies are built in the toughest times, and companies that survive when the market turns are often rewarded with increased market share and smaller, more efficient operations.


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