When the economy changes, uncertainty inevitably floods the job market. Many employers will opt to implement hiring freezes or make preemptive layoffs to cut costs. However, the best-positioned companies will actually ramp up hiring.
Great companies can often acquire customers, build new products and raise money, regardless of the market. As a job seeker in a bear market, it’s important to distinguish between startups that will sink and those that will swim. The best way to do that is to think like an investor. You are, after all, investing your time and energy into a company in exchange for a salary (and hopefully equity!).
The reality is that even in a “bad” market, companies will still get funded and hire top talent. To think like an investor and identify which companies are top tier, pay attention to these key attributes and don’t be afraid to ask the tough questions.
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Business Model
Understanding a company’s business model (including its weaknesses) is the most critical step. Good investors in a bear market pay attention to how a company is exposed to the broader economy.For instance, it's a bad sign if a company is integrated with a weak part of the economy (think housing during the Great Recession). This principle works the other way, too. Some companies are well-suited to specific economic downturns (think Zoom during the Covid-crash).
Capital-intensive businesses are at a big disadvantage when the economy takes a turn. Most investors in bear markets are skittish when it comes to company theses that require a lot of upfront capital, even if that capital is efficiently turned into revenue.
Financial Runway
A long runway is critical to a company’s ability to navigate an economic downturn. You should ask your recruiter or interviewer about the company’s runway. Though the question might seem uncouth, a strong startup will respect a candidate’s inquiry into the long-term health of the company.You’ll want to make sure the company has at least 12 to 18 months of runway. Though great companies will still be able to get funding during downturns, it's still possible for great companies to get passed over by investors, run out of money, and die. The more runway a company has, the better.
Talent Flow
While attracting top talent is important, a startup’s ability to retain talent is what you should be focusing on. Ask around and see if the best people stay at the company or use it as a stepping stone for something better. If talented people arrive, vest their options, and then leave immediately, that's a bad sign. If they arrive and stick around, it's a positive signal.This effect is highlighted in downturns — as valuations flatline or growth stalls, each employee’s equity value may fall short of expectations. Those who stick around must have full conviction in the long-term prospects of the business. (By the way, if markets crash and you work at a company with stock less valuable than when you joined, consider renegotiating your equity compensation!)
Investor Attitudes
Pay attention to investor attitudes. Getting insight into private companies is extremely difficult, particularly because most publicly available information will be press releases or fluff pieces. That’s why you should pay attention to investor attitudes.The world of VC is noisy, but good investors look at the big long-term picture. If a company raises a large round in a downturn from reputable investors, that's a strong indicator. You can even reach out directly to investors to solicit recommendations on which companies to consider joining. Many VCs are happy to support their portfolio companies by sending eager talent along.
Business Metrics
Understand how business metrics are changing with the market. The most common metrics to look at are:- Growth. How is top-line customer or revenue growth changing?
- Engagement. Are users spending as much time with the product as they did previously?
- Retention. Are customers cutting costs, or are they happy to keep spending money on the product?
- Efficiency Score. How much money does the startup burn to generate a dollar of revenue? Ideally, a startup would be able to spend $1 to generate $1 in revenue.
It’s normal for some of these metrics to be dampened in a downturn. But if any seem to tank, treat that as a red flag.
Of course, there is no pre-packaged formula to evaluate a startup’s business prospects. As a startup employee, make sure that your job will exist in 12 months, and make sure the company is resilient to supply or demand shocks. Although it can be scary to take the leap, top designers, engineers, and product-builders are rarely unemployed for long. As long as a prospective employer has a sufficient runway and stable metrics, a downturn can be an excellent time to join a rocketship.
