Silicon Valley giant Y Combinator is advising its portfolio founders to “prepare for the worst” as startups around the world scramble for a sharp reversal after a 13-year bull run.
The investment firm — whose early backing includes investments in Dropbox, Coinbase, Airbnb and Reddit — advised startups this week to cut spending and focus on expanding their runways over the next 30 days. For those who have no way to “live to default,” YC strongly recommends that they consider raising capital.
“If your plan is to raise capital in the next 6-12 months, you may be raising capital during the peak of a downturn. Remember that even if your company is doing well, your chances of success are very low . . We recommend that you change your plans,” the company said in a letter titled “Economic Downturn.”
A report from YC, which backs hundreds of young startups each year, suggests that the market meltdown that has slashed the value of a slew of tech companies, including giants like Shopify and Netflix, in recent weeks is creeping into the world of early-stage startups.
TechCrunch obtained the letter YC sent to its portfolio founders this week. You can read the email in its entirety below.
Greetings YC founders,
During the week, we had office hours with many YC companies. They proactively asked if their plans around spending, runways, hiring, and funding rounds should be changed based on the current state of the public markets. What we tell them is that economic downturns often turn out to be huge opportunities for founders who change their thinking quickly, plan ahead, and ensure their companies survive.
Here are some ideas to consider when making a plan:
- No one can predict how bad the economy will get, but things don’t look good.
- The safe thing to do is to prepare for the worst. If the current situation is as bad as the previous two recessions, the best way to prepare is to cut costs and extend the runway over the next 30 days.Your goal should be to reach alive by default.
- If you don’t have enough chances to sustain a default and your existing or new investors are now willing to give you more money (even under the same conditions as the previous round), you should strongly consider accepting it.
- Regardless of your ability to raise capital, if you are unable to raise capital within the next 24 months, it is your responsibility to ensure that your company will survive.
- Understanding the poor public market performance of tech companies can have a big impact on venture capital. VCs will have a harder time raising capital, and their LPs will expect more investment discipline.
As a result, even the top VC funds with large sums of money slow their capital allocation during downturns (smaller funds often stop investing or die). This has resulted in less deal competition among funds, leading to lower valuations, lower round sizes and fewer deals completed. In this case, investors also keep more money to back their best-performing companies, which further reduces the number of new financings. This slowdown will disproportionately affect international companies, asset-heavy companies, low-margin companies, hard-tech companies, and other companies with high consumption and long-term revenue.
Note that the number of meetings an investor attends does not decrease with the total investment. It’s easy to be fooled into thinking the fund is actively investing when it’s not.- For those of you who have started a company within the past 5 years, question what you consider a normal fundraising environment. It is very likely that your fundraising experience has been abnormal and future fundraising will be more difficult.
- If you’re post-A and pre-product market fit, don’t expect another round to happen until you’ve clearly achieved product-market fit. If you’re a pre-Series A participant, the Series A milestones we’re posting here might even be a little too low.
- If your plan is to raise money in the next 6 to 12 months, you may be raising money at the height of the recession. Remember that even if your company is doing well, your chances of success are very low. We recommend that you change your plan.
- Remember, many of your competitors won’t plan well, keep the fever high, and only find out they’ve screwed up when they try to improve the next round. During a downturn, you can often gain significant market share by staying alive.
- For more ideas, watch this video we created: Saving your startup in a downturn
the best,
YC
“PS: If for some reason you don’t think this information applies to your company, or you need someone to tell you in person to believe it…please reevaluate your beliefs monthly to make sure you don’t push your company Off the cliff. Also, remember that you can always reach out to your teammates,” the letter added.
