Y Combinator warns Startup Founders to Prepare for the Worst

Silicon Valley-based famed startup accelerator Y Combinator issued a warning to its network of startups about the coming economic downturn. In a note sent to its portfolio startups on May 19, 2022, the investment firm asked startups to prepare for the worst. Amidst the global market turmoil, Y Combinator advised founders to plan for a funding slowdown and the subsequent consequences on their respective firms.

Reasons for the Warning

The letter by Y Combinator came after a recent plunge in tech stocks and global markets. Meanwhile, ongoing supply chain shortages due to the pandemic and the Russia-Ukraine war have aggravated the situation. In addition, the American Fed’s decision to increase interest rates for the first time in years in March led to the funding slowdown. 

All these factors have contributed to falling markets, resulting in economic turmoil for the startups and venture markets.

Y Combinator’s Advice to the Startups

Considering adverse economic situations, Y Combinator advises startups to raise money from investors even in terms of their previous rounds, if possible. The startup’s core focus should be on survival for the next few months. Founders have to cut costs and extend their runways before they are out of money. 

Meanwhile, the companies looking to fundraise in the next 6-12 months should reconsider it as the chances of successful fundraising are ‘extremely low.’

However, the startup accelerator also pointed out that economic unpredictability can also be a huge opportunity for startups that survive. These startups can gain significant market share just by surviving the turmoil. 

In India, startups looking forward to big funding rounds, the future seems bland. Several top startups in India are firing employees to cut costs and survive. 

Earlier, automobile platform Cars24 let go of 600 employees. Besides, social commerce startup Meesho fired at least 150 employees last month. 

What Y Combinator have to say-

“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. 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,” Y Combinator said.

“VCs will have a much harder time raising money, and their LPs (Limited Partners) will expect more investment discipline. This causes less competition between funds for deals which results in lower valuations, smaller round sizes, and many fewer deals completed,” the investment firm further added.

About Y Combinator

Y Combinator is a Silicon Valley-based startup accelerator. The investment firm has expanded its operations in India over the last few years. Since its inception in 2005, YC has invested in nearly 3,000 companies. Its clientele boasts of unicorns such as Razorpay, Meesho, Groww, etc. 

The firm also backed Airbnb and Stripe in the early days. The combined valuation of its portfolio companies is over USD 300 billion. 

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