For Startups And VCs, Market Volatility Is A Constant. Are You Prepared?

By Alexander Lis

The current U.S. stock market correction is panicking many. However, in the VC ecosystem, the past five years have been marked by turbulence.

Statistically, only four out of 10 corrections lead to full-scale bear markets. And even if one materializes, opportunities prevail. VC funds hold $308 billion in dry powder — nearly 3x higher than pre-COVID levels. But while predicting a bear market is difficult, preparing for one isn’t.

Common mistakes to avoid

Spending like it’s still a bull market: When funding tightens and the next round is uncertain, founders may need to choose between cutting expenses or risk running out of capital. Although painful, it can be the difference between surviving and shutting down.

Undermining long-term thesis: Aiming to stretch their runway, some founders make the mistake of cutting critical functions — canceling essential features, slashing revenue growth or laying off key talent. This strategy might delay bankruptcy, but it transforms the company into an underperforming “zombie startup.”

Ignoring changing market conditions: Sharp valuation booms and busts are typically associated with public markets. However, public and VC markets influence each other in a nuanced way. A plunge in public tech stocks often leads to declining valuations for later-stage startups and muted dynamics for Series A valuations. Still, many founders mistakenly reject flat rounds, opting to delay fundraising — even at the risk of capital starvation.

What should founders do?

Set nonnegotiable goals: Identify a clear milestone that must be achieved regardless of market conditions — whether it’s hitting a customer satisfaction metric, releasing a killer feature, or securing a major client. This should be the priority.

Distinguish between mission-critical and “nice-to-have” expenses: Once you’ve set your goals, the next step is ensuring resources are allocated effectively. Separate mission-critical expenses (key hires, essential services) from those that are not — such as engineers working on noncritical features or experiments that are yet to be proven worthy. You’ll need to make quick decisions, and knowing what to cut is key.

Validate the goal with prospective investors: Don’t hesitate to ask prospective investors directly: If we achieve this goal, will it set us apart from our competitors? If it makes your startup outstanding in a bull market, it will make you more fundable in a bear market.

Build your investor pipeline: Start building relationships with potential investors before you’re actively fundraising. Keep an eye on their available dry powder. If a fund relies on future fundraising to deploy capital, it could pose a risk. Focus on funds with enough liquidity to support you through a downturn.

How to become a fund’s top priority

During tough times, investors may forget about companies without strong traction. Don’t panic, though. Sure, it’s easier to appeal to investors when your top line is growing exponentially. But if you’re not at that stage yet, here’s what can work.

First, prove that the problem you are addressing is ubiquitous. Once you’ve demonstrated why the opportunity is too big to miss, show a clear edge over your competitors.

Then, emphasize your commitment by finding creative solutions to pressing issues and keep your investors in the loop. Tell them that you acknowledge the challenges and have a clear plan to navigate them, including hard decisions.

The silver lining: Market corrections are opportunities

While market crashes often clear the playing field, they also create space for the most resilient companies to thrive. By having clear priorities, a strong fundraising plan, and adeptly pivoting, you can seize the opportunity.

In volatile times, the best-prepared founders and investors will emerge stronger.

Alexander Lis is the chief investment officer at Social Discovery Ventures. With 10-plus years of experience across public markets, VC, PE and real estate, he has managed a public markets portfolio that outperformed benchmarks, led early investments in SumSub, Teachmint and Byrd, and achieved 20%-plus IRR by investing in distressed real estate across the U.S.

Illustration: Dom Guzman