Strong investors are paying close attention to where their money is going

This article was originally published on FastCompany.com .

By now, we’re well aware that we are likely on the path to an?economic recession . The indicators are everywhere—from rising inflation, gas prices, dips in stocks, geopolitical uncertainties, and, most telling, rate hikes by the Fed. Startup valuations are?down across the board (paywall) , and many companies have had to resort to downsizing,?freezing , or even?canceling ?new hires. Those that have coasted on?historic bull runs ?to invest broadly are in jeopardy, too. It’s hardly surprising that the views-hungry doomsayers on social media are treating the recession like a looming apocalypse.

Bull runs, which are extended periods in which overall stock prices are on the rise, make it easy for investors to get and multiply their ROIs in short timeframes. They also make for a surprisingly large number of bad investments with oversights that appear glaring in hindsight. The rising tide is enticing and sweeps up even the biggest and most exacting investors. But when investors manage to back the right companies, they can make out like bandits—also known as savvy investors with a golden touch.

As the tide ebbs, will the bear market ring the death knell for the vibrant global startup ecosystems? Is easy money gone forever?

Bear markets will push investors to identify businesses with sound profitability frameworks and discourage business models that bet on customer acquisition with cash burn. Like Proof of Concept (POC), Proof of Earnings and Profitability may become equally, if not more, important. But for seasoned investors, bear markets can present equally convincing opportunities. After all, innovation does not follow market cycles. Investors just have to be willing to put in the work to find the diamonds in the rough.

SURVIVAL GUIDE FOR INVESTORS AND BUSINESSES

1. Follow the money

Tracking investments and budgeting for specific types of tasks is not enough. Investors need to know exactly where the money is and how it’s doing. With rising inflation rates and supply chain disruptions, your money may not go as far as you want. Investors need to have confidence in the finance team and the budgeting process.

2. Focus on substance

I get calls from companies that have previously raised funding in tens of millions of dollars that are now unable to secure the next series with lowered valuations. They may be down to their last six months of cash and can’t raise enough for the next five years. It’s not that the venture capitalists have suddenly lost trust in the business. They are just not capable of funding on the same basis anymore. They could also want more of the company for their money than what founders may be willing to share.

As reality starts to set in, tensions follow. Lengthy negotiations ensue, with neither side very happy with the results. Moreover, with all this talk around cash spends and valuations, the company’s actual product/service offering could be impacted.

3. Cash might decide your survival

As difficult as the situation is, there are ways to navigate these treacherous waters effectively. Cash-heavy growth investments with longer return must be kept nominal. Apart from lowering operational and labor costs, this could also mean backing out of prior commitments such as expanding into new areas.

Businesses need to reduce costs and outflows until they are operating on near-minimum viability and can stretch the annual budget to additional months or years. Companies need to be in a position where they will not need to raise capital for the next three to four years, not because they will lack the ability to raise funds, but because they will need to exchange a larger chunk of equity to raise smaller amounts. Cash reserves could very well dictate your survival in this environment.

4. Share the pain; focus on stability

While it’s easy to point fingers at the wasteful extravagance of founders for cash burn rates, the fact is that all of us got hooked on the easy money of prolonged bull runs. We have built a culture of innovation in which companies are encouraged to spend money to grow successfully. This is a normalized, but distorted, reality from traditional business models in which owners bet on growing their business at a set percentage, have cash on hand, yet still maintain a war chest, just in case.

Restoring normalcy would take shifting focus back from valuations to stability—stable business, employees, and customers. Protecting your business might involve taking a hit on margins to hold on to market share because customers are suffering, too.

5. Opportunities in the dark

As difficult as the scenario may be, it does contain nuggets of great opportunities. Investors will want to buy into broken relationships and acquire good businesses at great prices. There is tremendous opportunity for startups and companies involved in automation and cost management. We are going to see creative cost management in every facet of business operations, from infrastructure and resources to travel and healthcare. Through outsourcing to third-party contractors, temporary and remote workers will be normalized even at large organizations, so they can scale without affecting the current employee pool.

JUST A BUMP IN THE ROAD?

Recessions are a fact of the economy, but people have hunkered down, lived through them, and even come out better. In the scheme of business and life, recessions, while difficult, are?short-lived —plus, insecurity is the mother of invention. In the end, we will be fine, and we will bounce back.