The term bear market is one that often brings feelings of fear and dread to investors, entrepreneurs, and the general public alike. This is not a surprise when considering that mainstream media, financial analysts, and investors love to associate them with issues like a recession and high unemployment. But most people seem to ignore an undeniable fact: Bear markets are a natural part of market cycles.
Not only are bear markets completely normal but they are also necessary as they clean the negative effects of previous speculative runs, creating fertile soil for companies and projects with real substance to emerge. This positive effect of bear markets makes them an especially good opportunity for truly disruptive and innovative startups to succeed.
This is great news for any entrepreneur thinking about delaying your startup or business launch due to the current economic climate. Let’s take a look at three reasons why the bear market is an excellent opportunity for entrepreneurship.
1. Startups Launched During Bear Markets Might Outperform Other Businesses
Some of the world’s biggest startups were born during bear markets and recessions, including names like Zendesk, Airbnb, Uber, MailChimp, Salesforce, Activision Blizzard, Adobe, and many more. While there is some debate if crisis directly correlates to more successful startups, experts agree that businesses can succeed independently of the existence of a bear or bull market.
A well-known 2009 study by the Kauffman Foundation discovered that more than half of the most successful companies -; those on that year’s Fortune 500 list -; were launched during an economic downturn. Inspired by this study, Touchdown Ventures collected data in 2020 to conclude that industry-leading businesses can be born despite the state of the economy.
With this in mind, there is no reason for entrepreneurs with solid business plans not to get out there and launch their startups. If you have what it takes to launch a startup, not only does data suggest that you have the same (or more) chances of success during the bear market, but you will also enjoy less competition.
2. Your Startup Will Enjoy More Visibility
In fact, if you are looking to get visibility from venture capitalists and other investors, the bear market can be the best moment to do so. Over the past decades, investors have also become increasingly aware of the opportunities that bear markets represent. While due diligence increases during such times, the promise of increased profits in the future also results in increased scouting for new investment opportunities. Startups that are lucky enough to get noticed during bear markets will later reap the benefits of having taken advantage of the crisis.
3. Your Startup Will Be Ready When the Table Turns
Not only do bear markets eventually end, but they eventually transition into bull markets. This is why experts like Baker Boyer Wealth Management’s VP/Chief Investment Officer John Cunnison recommend looking for the prospect of gold in the rebound. This is not only because bear markets last less time than bull markets but also because of the shift in consumer sentiment.
Indeed, there is some very good data around the relationship between consumer sentiment and stock market returns in 12 months. The data shows that when people feel really good, the average return on the stock market 12 months later is around 4%, according to Cunnison. When data shows that people are feeling terrible, 12 months later stocks are up on average closer to 20%. Currently, consumer sentiment is about as low as it has ever been.
While the eventual coming of a bull market doesn’t mean that your startup will immediately succeed, launching during a bear market means that customer validation, marketing, networking, and similar efforts can be prioritized. As long as cash burn is not an issue, your startup should have enough reserves to make it through the bear market. Once customer and investor sentiment shifts, your business will be in a unique position to capitalize on the upcoming increase in investment.