For founders, I think it’s time to buckle up for a period of having a tougher time getting access to finance and customers being more conscious of what they spend.
So what should startups do with the very likely period of unrest ahead?
Over the past week, Y Combinator (YC) sent an email to its portfolio companies with advice for the months/years ahead.
Read it all here. 👇
Subject: Economic Downturn.
Greetings YC Founders,
During this week we’ve done office hours with a large number of YC companies. They reached out to ask whether they should change their plans around spending, runway, hiring, and funding rounds based on the current state of public markets. What we’ve told them is that economic downturns often become huge opportunities for the founders who quickly change their mindset, plan ahead, and make sure their company survives.
Here are some thoughts to consider when making your plans:
- No one can predict how bad the economy will get, but things don’t look good.
The safe move is to plan for the worst. If the current situation is as bad as the last two economic downturns, the best way to prepare is to cut costs and extend your runway within the next 30 days. Your goal should be to get to Default Alive.
- If you don’t have the runway to reach default alive and your existing investors or new investors are willing to give you more money right now (even on the same terms as your last round) you should strongly consider taking it.
- Regardless of your ability to fundraise, it’s your responsibility to ensure your company will survive if you cannot raise money for the next 24 months.
- Understand that the poor public market performance of tech companies significantly impacts VC investing. VCs will have a much harder time raising money and their LPs will expect more investment discipline.
- As a result, during economic downturns even the top tier VC funds with a lot of money slow down their deployment of capital (lesser funds often stop investing or die). This causes less competition between funds for deals which results in lower valuations, lower round sizes, and many fewer deals completed. In these situations, investors also reserve more capital to backstop their best performing companies, which further reduces the number of new financings. This slow down will have a disproportionate impact on international companies, asset heavy companies, low margin companies, hardtech, and other companies with high burn and long time to revenue.
- Note that the numbers of meetings investors take don’t decrease in proportion to the reduction in total investment. It’s easy to be fooled into thinking a fund is actively investing when it is not.
- For those of you who have started your company within the last 5 years, question what you believe to be the normal fundraising environment. Your fundraising experience was most likely not normal and future fundraises will be much more difficult.
- If you are post Series A and pre-product market fit, don’t expect another round to happen at all until you have obviously hit product market fit. If you are pre-series A, the Series A Milestones we publish here might even turn out to be a bit too low.
- If your plan is to raise money in the next 6-12 months, you might be raising at the peak of the downturn. Remember that your chances of success are extremely low even if your company is doing well. We recommend you change your plan.
- Remember that many of your competitors will not plan well, maintain high burn, and only figure out they are screwed when they try to raise their next round. You can often pick up significant market share in an economic downturn by just staying alive.
For more thoughts watch this video we’ve created: Save Your Startup during an Economic Downturn
The good news is that innovation never stops, and great companies rise no matter how the economy does.
Some of the most resilient businesses were born during a recession, such as Microsoft, Apple, Netflix, Adobe, Airbnb and Slack, and if you give a quick search online, the list goes on and on.
Like all businesses, they will likely go through trouble over the coming months (if all plays out as the news expects).
But, after being born in the fires of recessions, they have already weathered the storm and are likely to again.
The end of crazy valuations for now?
We’ve all seen the crazy valuations of tech businesses which seem to be valuable only on paper.
The downside of “easy” money is stupid valuations which are never likely to be hit and are almost guaranteed failure (in the eyes of investors).
Fast raised a huge Series-B but,
Fast’s entire 2021 revenue was about $600,000. But, it was spending as much as $10 million per month. 🤦🏻♂️
Fast shut down in April, letting go 450 employees and losing its investors of $120 million.
I think we will see fewer mistakes like this happen if we do head into recession and VCs become a little more reserved with their spending.