The Bull Case for Venture Capital in a coming Bear market

Jonathan Tower
Mar 14 · 9 min read
Don’t fear the bear. History suggests we might be entering a superb time for tech investing

COVID-19 has now circumnavigated the globe, infecting more than 100k (as of this writing) and killing thousands. Public market equities shed trillions in value as investors ponder the long-term impact of the pandemic. Global travel has ground to a halt. Conferences, film premieres and sporting events are cancelled. Virtually everywhere the public convenes sits eerily empty.

Tech has not been spared either. According to CB Insights, the biggest tech companies in the US have seen more than $500B wiped off their collective market cap since January 30, when the WHO announced a public health emergency.

So, as the 11-year bull market comes to an end and we likely head into the kind of counter cyclical environment many have long anticipated, what does that mean for tech founders, venture investors and Limited Partners?

COVID-19 was (and is) a black swan medical crisis, not a financial or economic one

A black swan medical crisis; not a systemic market failure

As sad and horrific as the human toll of COVID-19 is, from a market perspective what we are experiencing is not akin to the wholesale failure of the global banking system which triggered the Global Financial Crisis (GFC) of 2007–2008. Nor is it on the scale of the market conditions post 9/11. The GFC was a systemic failure that was years in the making. 9/11 was a shocking terrorist attack which brought the US into protracted desert wars and came barely a year into the dot-com bust of 2000–01. Both events took years from which to recover. Arguably, in the case of the GFC, some corners of the US economy never fully recovered.

Fortunately, we are not there. From a market fundamentals perspective, things do not appear likely to approach the conditions of those two seismic events. COVID-19 was (and is) a black swan medical crisis, not a financial or economic one, although it is having downdraft economic effects. The current pandemic comes at a time when the longest bull market in history was already showing signs of fatigue. So, a correction was in order; not a systemic crash.

The bull was getting winded

Even before the first cases of COVID-19 appeared, there were warning signs that the bull market was long in the tooth. While 2019 saw a bumper crop of tech IPOs, and many did perform well, there were also high-profile disappointments. Those high-profile disappointments seemed to swamp the lesser hyped successes, so a narrative began to form that tech had perhaps gotten ahead of itself. Valuations were at all-time highs. Many me-too companies with dubious business models and unsound unit economics had been funded and were competing with one another for talent, real estate, and other precious human and physical assets. Silicon Valley excesses — from personal cryotherapy chambers to luxury backyard chicken coops — had become the fodder of late night comedians. Something had to give; and give it did.

While it may have taken a frightening global pandemic to bring the market to this place, any number of exogenous or endogenous factors could have triggered this moment. But now that we are here, what can we glean from this and what does it mean for the industry in general and for tech founders, venture investors and limited partners in particular?

This is not a tech-lash

Unlike the dot-com bust, the current market tumult has nothing to do with technology. While some recent tech IPOs have not fared well in the public markets, the reasons for the market’s lukewarm response to those debuts have more to do with the underlying fundamentals of those businesses. It was not a wholesale rebuke of the technology sector as a whole.

“The market has not soured on tech companies per se; it has soured on wildly unprofitable tech companies with wobbly unit economics, unsound management practices, and still-unproven business models.”

While a bear market will encourage investors to be even more skeptical of such businesses — and, in some cases, to conduct actual due diligence, not simply the illusion of due diligence — it will not unduly prejudice the entire technology sector.

Bear markets present exceptional opportunities to build great businesses

A narrative violation in technology has long persisted that the best time to found a startup is during bull markets when stock portfolios are enjoying impressive gains, venture capital is plentiful on generous terms, and it seems everyone is quitting their corporate jobs to launch a startup. The data would prove otherwise. While great companies are founded in all markets, as is often repeated, some of the biggest technology names were formed and funded during challenging economic times: AirBnB (‘08), Square (‘09), Stripe (‘09), Facebook (‘04), Uber (‘09), Groupon (‘08), Playdom (‘08), Adobe (‘82), Electronic Arts (‘82), and Microsoft (‘75), to name just a few.

Arguably, boom times may be the worst time to launch a startup. Witness what we’ve experienced in Silicon Valley and in a handful of other established tech hubs in recent years: a ferocious competition for talent; unprecedented hiring challenges and wage levels; costs for office space, attorneys, consultants and advisors at all-time highs; tight housing markets; skyrocketing rents and living expenses for employees; community backlash; tax and regulatory burdens; and so forth.

While readily available venture capital in a bull market might more easily enable a budding entrepreneur to fund her lofty startup vision, it often also funds many other budding entrepreneurs with similar ideas.

Therefore, that entrepreneur, once funded, finds herself competing with twenty other newly funded startups pursuing the same market opportunity and competing for the same talent and resources. Those startups are also being forced to burn through a good amount of their investors’ capital competing against each other, and not focusing on the incumbents on which they (and their investors) would prefer they’d train their firepower. In the end, the infamous Peter Thiel quote proves accurate: an enormous amount of the venture capital that startups raise in a bull market ends up in the pockets of landlords, service providers and of companies like Google and Facebook, not directly taking on incumbents and building sustainable businesses.

Bear markets ‘lower the volume’ so teams can focus

A welcome consequence of a bear market is that it has a way of lowering the volume on everything that can distract a startup team. Great companies and robust products take time. In frothy markets, startup teams feel undue pressure to continue raising capital and guarding their flanks against me-too startups launching in their wake, seemingly every week. In a bear market, there’s a flight to quality and, as a consequence, fewer competitors are getting funding. As such, those teams that do secure capital can actually focus on building a great company, a robust product and a sustainable market position. And, unlike in bull markets, startup CEOs are not unduly pre-occupied with team attrition because their best engineers are not constantly being poached by better funded, more established rivals. Team cohesion improves as a result.

Bear markets typically generate better venture returns

Correspondingly, bear markets are exceptionally good markets in which venture capitalists, and the limited partners (LPs) that invest in their funds, should be actively investing. Much as startups can take advantage of a less hectic pace to build companies of significance, venture capitalists can also spend more time with their portfolio companies to coax those companies into their fullest expression. The urge to not miss a single beer bust, startup mixer or launch party for fear that the next great company founder might be in attendance is mitigated somewhat. VCs still work as hard as ever, but the focus seems more channeled and directed, less scattered, and less driven by FOMO.

Moreover, the trickle down benefits of a bear market to a VC — lower OPEX costs for one’s portfolio companies, more talent available, more rational valuations, a smaller competitive set, etc — has the effect of making a venture investor’s capital go a great deal farther than it does in a frothy bull market. And those lower valuations and longer runways for portfolio companies for the same invested capital has a direct and positive impact on venture returns.

For LPs, similar dynamics are at play. Historically, the best VC fund vintages tend to have been those that were invested during bearish markets. For LPs to step away from venture now when valuations will almost assuredly come down, capital will go farther, and ownership stakes for that same capital will increase, would be a grave mistake.

“LPs that were spooked after the dot-com bust and sat out the 2002 — 2006 period missed the Consumer Internet/Web 2.0 wave and some of the best VC returns in a generation.”

Similarly, those that retreated following the GFC of 2007–08 missed enormous returns generated in the venture asset class from investments made in startups between 2009 to 2015.

In Summary: Tech innovation does not stand still

Finally, the global technology innovation boom that we have been witnessing in recent years shows no sign of abating. Technology progresses irrespective of where the Dow is that week. Moreover, when times are challenging there is an even greater focus by both enterprises and consumers on managing expenses, which would naturally favor startups that are deploying technology solutions to improve efficiencies.

At my fund, Catapult, which has a specific focus on investing in emerging tech ecosystems outside Silicon Valley, we spend a great deal of time in nascent tech ecosystems in North America, the EU and Central/Eastern Europe. In our extensive travels, we have found that it is in some of the most under-served markets like Istanbul and Tbilisi where the entrepreneurial spirit is most in evidence; and those markets have virtually no venture capital ecosystem to speak of; just incredible entrepreneurs with an indomitable spirit to compete and win.

And whether a startup team is in Kansas City or Kuala Lumpur, it is most likely using Slack, or Zoom, or Asana, or Trello, or any number of workforce collaboration platforms that can enable it to be both globally competitive and cost competitive as it sources the world’s best talent, regardless of where it resides.

While a bear market may temper the rate of this global innovation it will by no means extinguish it because the catalyst behind the current innovation boom has little to do with capital and much more to do with the irrepressible entrepreneurial spirit and with the desire of founders to apply technology solutions to address fundamental global challenges.

It also has to do with compliant governments around that world that see the promise of technology innovation to re-tool their economies from those driven by old world industries like mining and manufacturing to ones that prioritize high value intellectual work and entrepreneurship. This, in turn, stimulates job creation, quells the brain drain, expands the tax base, and creates the vaunted flywheel effect of a robust tech hub, which attracts future generations of visionary founders to those geographies.

With the recent advancements in remote workforce collaboration platform technologies and the availability of low cost bandwidth and cloud storage, addressing these challenges becomes a question principally of ingenuity, not capital. And there will always be sufficient capital for great founders with bold ideas that have purpose and global potential. For us at Catapult, we’re excited by the enormous opportunities in the years ahead for tech innovation and tech investment and we’re decidedly open for business. You should be as well.


Jonathan Tower is Founder and Managing Partner at Catapult VC. Catapult is a global early stage venture firm with assets in multiple geographies investing in the best startups from fast-emerging tech ecosystems outside Silicon Valley and helping those companies achieve global scale. Jonathan’s previous investments include Dollar Shave Club ($1Bn acquisition by Unilever), Jet.com ($3.5Bn acquisition by Walmart), Madison Reed, MapR Technology, IfOnly.com, and many others that went on to great outcomes.

Jonathan writes frequently on venture capital and technology topics on his blog, Adventure Capitalist, and he’s been a frequent contributor to The New York Times, Fortune, The Wall Street Journal, FastCompany, Forbes, The Washington Post, The LA Times, and other leading publications.

Follow Jonathan on Twitter @jonathan_tower

Jonathan Tower

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Jonathan is Founder and Managing Partner at Catapult VC, a global early stage venture firm with assets in multiple geographies.

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