In recent years we have witnessed the flourishing of multiple startups with millionaire valuations throughout the world. A prosperous time according to startup accelerator YCombinator could be about to end, as it warns that the good times may be coming to an end for these types of companies and that we must “prepare for the worst”.
“No one can predict how bad the economy will be, but things are not looking good for now.YCombinator wrote in a letter titled “Economic Recession”, so we can get an idea of the problem we could be facing. “The safest move is to prepare for the worst”affirms the accelerator in its statement.
If it were anyone who warned us about the winds of change, we might show some skepticism, however YCombinator is one of the top startup accelerators worldwide, having worked over the years with benchmarks in the digital landscape such as AirBnB, Twitch, Stripe or Dropbox.
YCombinator paints a bleak picture for startups in the coming months
YCombinator advice focuses on suggest that new businesses reduce their expenses. «If your plan is to raise money in the next 6-12 months, you may be raising it at the height of the recession. Remember that your chances of success are extremely low, even if your company is doing well. We recommend you change your plan“, assured the firm in its letter.
This is a clear sign of a change in trend, which in fact in recent months has seen a reduction in the number of operations related to technology companies, which had experienced a time of large investment flows from venture capital funds and business angels. A situation detonated by triggers like inflation, interest rates and geopolitical unrest which has caused the classic rounds of financing with which these companies increase their capital to be more difficult to obtain.
But let’s see what exactly Y Combinator’s letter to startup founders says:
Y Combinator letter to the founders
During this week we have held a series of meetings with a large number of YCombinator companies. They reached out to ask if they should change their plans around spending, hiring, and funding rounds based on the current state of the public markets. What we have told you is that economic downturns often become great opportunities for founders who quickly change mindsets, They plan ahead and make sure their business survives.
Keys to consider when planning the coming months for your company:
1. No one can predict how bad the economy will get, but things are not looking good.
two. The safe move is to prepare for the worst. If the current situation is as bad as the last two economic recessions, the best way to prepare is to cut costs and extend your runway within the next 30 days. Your goal should be to reach the “default alive” situation (The state of “default alive” is a concept developed by Y Combinator itself, which is applied to startups that, not being profitable at present, are on the way to achieving that profitability in the short/medium term, verifiable thanks to its growth rate, the improvement of its profitability indicators and other factors such as the decrease in the cost of acquiring customers)
3. If you are not on track to default alive and your existing investors or new investors are willing to give you more money right now (even on the same terms as their last round), you should seriously consider accepting it.
4. Regardless of your ability to raise funds, it’s your responsibility to make sure your business survives if you can’t raise money for the next 24 months.
5. You must understand that poor public market performance of technology companies significantly affects venture capital investment. Venture capitalists will have a much harder time raising money and its limited partners (contributors) will expect greater investment discipline.
As a result, during economic downturns, even deep-pocketed top-tier venture capital funds slow their deployment of capital (lesser funds often stop investing or die). This causes less competition between funds for transactions, which translates to lower valuations, smaller round sizes and far fewer completed transactions. In these situations, investors also set aside more capital to support their best-performing companies, further reducing the number of new financings. This slowdown will have a disproportionate impact on international companies, asset-heavy companies, low-margin companies, hard tech, and other companies with high consumption and a long time to generate revenue.
Note that the number of meetings held by investors does not decrease in proportion to the reduction in total investment. It’s easy to be fooled into thinking a fund is actively investing when it isn’t.
6. For those of you who have started the company in the last 5 years, ask what you think the normal fundraising environment is. Chances are your fundraising experience was not normal and future fundraisers will be much more difficult.
7. If post-Series A and before product market adjustment, don’t expect another round to happen until you’ve reached product market fit. If it’s earlier than Series A, the Series A milestones we post here might even turn out to be too low.
8. If your plan is to raise money in the next 6-12 months, you may be raising it at the height of the recession. Remember that your chances of success are extremely low, even if your company is doing well. We recommend you change plans.
9. Remember that many of your competitors will not plan well and They’ll only realize they’re in trouble when they try to raise their next round. You can often gain significant market share during an economic downturn just by staying alive.
For more ideas, Save Your Startup During an Economic Downturn
“PS: If for any reason you think this message doesn’t apply to your business or you’re going to need someone to tell you in person to believe it… reassess your beliefs on a monthly basis to make sure you’re not driving your business right off the cliff. Also, remember that you can always communicate with your groupmates”ends the letter.
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