One thing it obviously does not address is the human element of who you cut and whether they will be “default alive” unemployed in a recession. A huge amount of YC advice in general positions founders as protagonists and employees as NPCs then are shocked people pick Google over their startup offer.
Funny thing is I’ve seen this exact advice destroy a company. In March 2020 they did deep layoffs and cited the need to be “default alive.” Then their main market surprisingly quickly grew in the rest of 2020 , they wanted to capitalize on that, but they had laid off too many engineers who knew their infra and had enough outages and slow product development that they lost to their competitors and are now way underwater on their valuation.
They decided to be serious and prudent and go “default alive” which ironically killed them. Of course if 2020 had gotten worse maybe they would look smart but the takeaway is there’s no easy answers.
I would just like to see the human impact of layoffs at least lightly considered in these conversations which it rarely is. And it’s bad for business to as Im sure many people are hesitant to join companies that will have a gut reaction of doing 70% layoffs. If you even think about doing 70% layoffs you clearly over hired and are not making good leadership decisions leading up to the layoff.
> If you even think about doing 70% layoffs you clearly over hired and are not making good leadership decisions leading up to the layoff.
100% agree with this part.
Going default alive was not the cause of whatever this company was dying. At best, it would slow or kill your growth, not your company. It sounds like it was mismanaged and prioritized something else over fixing their product. It is not bad for a company to focus on profitability.
More employees also does not mean faster product development, every developer knows this is often the complete opposite.
> Funny thing is I’ve seen this exact advice destroy a company. In March 2020 they did deep layoffs and cited the need to be “default alive.” Then their main market surprisingly quickly grew in the rest of 2020
I recognize that later in your comment you say "Of course if 2020 had gotten worse maybe they would look smart" but I think it's worthwhile to compare/contrast the pure macroeconomics of early pandemic versus now. To the Fed the pandemic was an exogenous shock and they unleashed all their tools to keep the economy going. Now they are dealing with the backlash of unleashing all their tools (inflation) and are making it very clear that their priority is to bring down inflation and they are very aware that they do that by bringing down employment. So encouraging startups to go default alive is very much what the Fed wants right now. Big difference in policy direction. Exogenous shock versus endogenous course correction.
When COVID first hit, we were forced to go default alive. We didn't let anyone go but implemented a hiring freeze for 6 months and we managed to grow revenues to become cash flow positive. Default alive doesn't necessarily mean having to let go of employees.
Getting laid off is not a good feeling, but if I can rank order who I should reserve my sympathy, especially during an economic downturn, a laid off tech worker in a startup is the one I’d sympathize with the last. It has never been hard even during downturns to find work in tech. At least comparatively.
> Funny thing is I’ve seen this exact advice destroy a company. In March 2020 they did deep layoffs and cited the need to be “default alive.” Then their main market surprisingly quickly grew in the rest of 2020 , they wanted to capitalize on that, but they had laid off too many engineers who knew their infra and had enough outages and slow product development that they lost to their competitors and are now way underwater on their valuation.
It sounds like it was an unhealthy company and just didn't realize it till the tide went out. Seems doubtful that a quarter or two of fewer engineers slinging code was the root of its inability to attract & retain customers in a growing market.
That's just bad software engineering. In general, I would expect software to scale well as far as traffic is concerned esp in today's environment where scaling infra is not really a big deal. Coping with feature requests on a shoestring staff is a different story.
> One thing it obviously does not address is the human element of who you cut and whether they will be “default alive” unemployed in a recession.
An individual's personal financial circumstance is not a factor though. There are many people that have fixed their personal finance issue adequately. And for those who really don't have easy choice of employers or personal runway, then they're fucked. Did that really need to be said? That's what is going to happen.
"Doing multiple small layoffs is a form of cascading failure. Do one layoff, but much much deeper than seems correct. Do it decisively. Do it so that you get profitable. In your case that is something like a 70% cut, not a 5-10% cut. Yes you read that right: a 70% cut. Cutting once and cutting hard allows you to reassure the people that are still here that you are truly profitable and won’t need to do it again. Doing a layoff and remaining unprofitable and counting on fundraising to save you is a stupid plan."
> a 70% cut...Cutting once and cutting hard allows you to reassure the people that are still here that you are truly profitable
If your employees are dumb enough that they interpret a 70% cut of the workforce as a sign that your company is stable, you're doomed. It's hard to imagine the dumbest person in the world interpreting that as a sign of stability.
"No one cannot predict how bad the economy will get, but things don't look good."
Clif notes:
- Plan for the worst ... cut costs within 30 days... get to Default Alive[0]
- Get money if you need it, and if you can
- With or without money you must survive 24 months
- VCs are people too, and subject to the same downturn. Adjust your fund raising expectations in the same direction. Expect lower valuations, lower rounds and many fewer deals.
- Disproportionate impact on international, asset heavy, low margin, hardtech, high burn, long road to revenue companies
- If you get a meeting, don't take that as a good sign, we still take a lot of meetings.
- Future fundraises will be much more difficult than they have been in the last 5 years.
- Don't expect more money until you demonstrate product market fit.
- If you planned on raising money in the next 6-12 months, we recommend changing that plan, or you may be tryng to raise at the peak of the downturn
- If you survive, and your competitor does not, you may pick up significant market share.
>- If you get a meeting, don't take that as a good sign, we still take a lot of meetings.
They don't explicitly spell this out, but this is because being a VC is still a job. Even if they're not actually making any deals, management doesn't want to see everyone sitting at a desk scrolling twitter for 8 hours, so instead they do pointless meetings.
Matt Levine had a fun Great Recession story which I cannot find right now, which is that during 2008 in the M&A department at Goldman Sachs everyone still came to work, even though obviously merger and acquisition activity was way down. They would spend every day doing calls and making pitchbooks, all of which went nowhere. Goldman didn't close a deal for a full year. A floor full of people could have just collected a salary and stayed home for 12 months and it would have had an identical outcome.
The stock market is not the economy. If you are working for a money losing VC backed company and the VCs aren’t willing to keep throwing money at you, that’s because the VCs know startup funding is a Ponzi Scheme and they will be left holding the bag instead of being able to pawn their investment off onto the retail market.
Like inflation, it's self-fulfilling. Perception is reality. Some people who strongly influence public perception - to whom we seem to have ceded our power to think critically and independently - who look for social disruption, want it.
If businesses pull in their horns, stop supporting innovation, the economic result is easy to predict.
1. Good people will be more available (there will be public company cuts and private cuts, as well as resignations, especially people working for companies in the Series B to Series D range (who raised those rounds at the old multiples) who will need massive growth/patience for their options to grow into the new multiples).
2. As businesses cut costs, those are opportunities for products and services which enable efficiency.
Companies that have a good ideas and provide needed product/services will survive. I think the era of stupid money chasing silly ideas are over. Same thing happened at the end of the dot-com era.
> I think the era of stupid money chasing silly ideas are over
It's quite possible that this era of that is over, but I'll eat my hat if another era of stupid money chasing silly ideas doesn't spring up within a decade.
Lots of startups provide needed products and services. I don't think that's enough. They need to provide needed products/services in a way that can be sold/marketed profitably, and scaled profitably.
I think the causation can be reversed: Companies that survive long enough have a higher chance of eventually finding the right idea and developing needed products / services.
A company that provides a needed product/service has the minimum it needs to survive. But you also need positive cash flow and you need to not have surprises and many other things. So it's easy to get caught in a bad situation and the company is forced to shut down, even though it was otherwise doing good things. Startups are particularly vulnerable, regardless of their PMF.
Going to be interesting to see which free plans get cut, prices skyrocket, or what companies stop having "open core" software. Growth hacks like these have always traded revenue instead of cash for advertising/exposure, and I think it gave well-capitalized companies too much of an edge where they can effectively give things away and undercut competitors who are trying to be sustainable.
Would've also been interesting if they had separate guidance for crypto startups.
I am currently graduating with a CS degree and interpreting this as a warning to not accept the offer from the exciting startup and instead accept the offer from the big corporate fintech company. Is there any reason I could be wrong?
There's a trend of global economic inflation, caused by supply issues in energy (oil, gas in all forms) related to the war in Ukraine, supply issues more broadly related to a hangover from COVID's supply/demand shocks.
Interest rates are rising, to appease inflation.
As the interest rate goes up, allocators of capital have less appetite for risky allocations. This makes access to capital for VC firms becomes more competitive. This makes access to capital for "startups" becomes more competitive.
There's also a bigger macrotrend, which is another hangover from COVID: investment poured into the tech sector, which was booming during COVID. Investors over-bullishly priced-in the idea that this boom was, in fact, a new baseline or indicative of future exponential growth. As we recover from COVID, these pricings are increasingly revealed to be wrong as companies generally report post-COVID numbers that are closer to pre-COVID numbers.
This is bad for investors leveraged on tech. Therefore, it's bad for VCs that raised LP capital on the basis of COVID performance. Therefore, it's bad for companies that raised >20x ARR multiples on the basis of COVID performance.
Basically, it's a single or double whammy for most of the economy, but a double or triple whammy for unprofitable startups.
Encourages resource mis-allocation, which means there is less stuff we actually need to go around.
We should have used fiscal policy more aggressively to fix the Great Recession, but that would entail taking money from rich people and giving it to poor people, and we can't have that can we?
Inflation and interest rates are rising (for lots of reasons), which means money is getting much more expensive. This means that high-growth companies and unprofitable companies are going to get burned hard in the near future, because their very existence relies on access to cheap money.
The wider economy isn't terrible. Inflation is rising and GDP is pulling back a little bit, but unemployment is low, and wages are mostly flat.
But the NASDAQ (comprised of mostly tech stocks) is down 26%+ year-to-date and falling. People on this forum mostly work in software, and this downturn will almost certainly shift the balance of power from unprofitable high-growth companies (especially crypto, Web3, etc.) to companies that actually make real money.
I wouldn't take this to be a guarantee that we're moving into a recession, but the VC market is drying up quickly, and this is an appropriate level of concern for YC to have for its companies.
I still get a couple dozen emails/week from recruiters in addition to phone calls, linkedIn connection requests,etc. - it seems like it's still close to the peak number. However, I suspect that's about to stop abruptly.
Honestly I would just go work for FB/Google/MS/Apple and maybe Amazon. I'll only consider a startup if I can grow with the company and corresponding opportunities don't exist in the big ones. If the YC theory is basically that employees are a toxic asset, they are bound to get people who turn out that way since the more performant and responsible folk will opt for bigger and more stable companies.
Edit: I don't really think all YC backed companies think that low of employees.
I don't remember that they said something like this during COVID, Did they say something like that in 2008, or is that an unprecedented statement? I mean they exist since 2005, what did they say during the "Great Recession" ? (i think they called it like that, at some point...)
I mean, i mean: is this one going to be worse than 2008?
Fortune magazine is trying to compare our current problems with 2008. They say that it might turn out to be worse, this time, as 2008 was merely a "black swan event", the difference being that inflation is coming "for real" right now. https://fortune.com/2022/03/26/great-recession-key-differenc...
Also this:
"By some standards, stocks are now even more overvalued than they were back then, leading some experts to argue we’re experiencing an “everything bubble.”
Dan Ives told Fortune. “Tech valuations relative to growth, in particular, are much cheaper today, by about 25%, than they were going back to ‘07.”
Ives argued that the financial stability of tech stalwarts, which by some estimates represent over 20% of the S&P 500, is unparalleled, noting that the Great recession was mainly a “black swan driven event.” "
So they might have to come up with a new name, if this one turns out to be worse. Maybe they should go for the "Even Greater Recession", abbreviated as EGR...
Also the economists don't appear to have predicted it. Well, at least US Intel was right about the war in Ukraine...
Translation: as has been the case since the dawn of capitalism, companies going forward will have to turn a real, liquid profit from selling an actual good or service. Gone are the (highly anomalous) days of starting a purposefully unprofitable company whose only path towards “profitability” is a) getting acquired or b) endless rounds of VC funding.
Is it possible to raise a series A before reaching product market fit ? I thought it's more like you raise a Series A to scale up ? Why would someone give you 20M dollars to just do research ? Never did this myself btw do maybe all these questions are tosh.
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:
1. No one cannot predict how bad the economy will get, but things don't look good.
2. 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.[1]
3. 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.
4. 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.
5. 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 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.
6. 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.
7. If you are post Series A and pre-product market fit,[2] don't expect another round to happen at all until you have obviously hit product market fit. The Series A Milestones[3] we publish here might even turn out to be a bit too low.
8. 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.
9. 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.
10. For more thoughts watch this video we've created: Save Your Startup during an Economic Downturn.[4]
> This slow down will have a disproportionate impact on international companies, asset heavy companies, low margin companies, hardtech, and other companies with high burn long time to revenue.
Wonder how things will shake out for biotech. I know biotech investors have long timeline, but surely they are feeling pressure too ("LPs will expect more investment discipline")
[+] [-] ditonal|3 years ago|reply
One thing it obviously does not address is the human element of who you cut and whether they will be “default alive” unemployed in a recession. A huge amount of YC advice in general positions founders as protagonists and employees as NPCs then are shocked people pick Google over their startup offer.
Funny thing is I’ve seen this exact advice destroy a company. In March 2020 they did deep layoffs and cited the need to be “default alive.” Then their main market surprisingly quickly grew in the rest of 2020 , they wanted to capitalize on that, but they had laid off too many engineers who knew their infra and had enough outages and slow product development that they lost to their competitors and are now way underwater on their valuation.
They decided to be serious and prudent and go “default alive” which ironically killed them. Of course if 2020 had gotten worse maybe they would look smart but the takeaway is there’s no easy answers.
I would just like to see the human impact of layoffs at least lightly considered in these conversations which it rarely is. And it’s bad for business to as Im sure many people are hesitant to join companies that will have a gut reaction of doing 70% layoffs. If you even think about doing 70% layoffs you clearly over hired and are not making good leadership decisions leading up to the layoff.
[+] [-] jimhi|3 years ago|reply
100% agree with this part.
Going default alive was not the cause of whatever this company was dying. At best, it would slow or kill your growth, not your company. It sounds like it was mismanaged and prioritized something else over fixing their product. It is not bad for a company to focus on profitability.
More employees also does not mean faster product development, every developer knows this is often the complete opposite.
[+] [-] kaycebasques|3 years ago|reply
I recognize that later in your comment you say "Of course if 2020 had gotten worse maybe they would look smart" but I think it's worthwhile to compare/contrast the pure macroeconomics of early pandemic versus now. To the Fed the pandemic was an exogenous shock and they unleashed all their tools to keep the economy going. Now they are dealing with the backlash of unleashing all their tools (inflation) and are making it very clear that their priority is to bring down inflation and they are very aware that they do that by bringing down employment. So encouraging startups to go default alive is very much what the Fed wants right now. Big difference in policy direction. Exogenous shock versus endogenous course correction.
[+] [-] victorology|3 years ago|reply
[+] [-] ramraj07|3 years ago|reply
[+] [-] rkk3|3 years ago|reply
It sounds like it was an unhealthy company and just didn't realize it till the tide went out. Seems doubtful that a quarter or two of fewer engineers slinging code was the root of its inability to attract & retain customers in a growing market.
[+] [-] thecleaner|3 years ago|reply
[+] [-] vmception|3 years ago|reply
An individual's personal financial circumstance is not a factor though. There are many people that have fixed their personal finance issue adequately. And for those who really don't have easy choice of employers or personal runway, then they're fucked. Did that really need to be said? That's what is going to happen.
[+] [-] aresant|3 years ago|reply
https://dalton.substack.com/p/letter-to-myself-in-late-2008?...
For a taste:
"Doing multiple small layoffs is a form of cascading failure. Do one layoff, but much much deeper than seems correct. Do it decisively. Do it so that you get profitable. In your case that is something like a 70% cut, not a 5-10% cut. Yes you read that right: a 70% cut. Cutting once and cutting hard allows you to reassure the people that are still here that you are truly profitable and won’t need to do it again. Doing a layoff and remaining unprofitable and counting on fundraising to save you is a stupid plan."
[+] [-] bachmeier|3 years ago|reply
If your employees are dumb enough that they interpret a 70% cut of the workforce as a sign that your company is stable, you're doomed. It's hard to imagine the dumbest person in the world interpreting that as a sign of stability.
[+] [-] irthomasthomas|3 years ago|reply
"No one cannot predict how bad the economy will get, but things don't look good."
Clif notes:
- Plan for the worst ... cut costs within 30 days... get to Default Alive[0]
- Get money if you need it, and if you can
- With or without money you must survive 24 months
- VCs are people too, and subject to the same downturn. Adjust your fund raising expectations in the same direction. Expect lower valuations, lower rounds and many fewer deals.
- Disproportionate impact on international, asset heavy, low margin, hardtech, high burn, long road to revenue companies
- If you get a meeting, don't take that as a good sign, we still take a lot of meetings.
- Future fundraises will be much more difficult than they have been in the last 5 years.
- Don't expect more money until you demonstrate product market fit.
- If you planned on raising money in the next 6-12 months, we recommend changing that plan, or you may be tryng to raise at the peak of the downturn
- If you survive, and your competitor does not, you may pick up significant market share.
[0] http://www.paulgraham.com/aord.html
[+] [-] sbierwagen|3 years ago|reply
They don't explicitly spell this out, but this is because being a VC is still a job. Even if they're not actually making any deals, management doesn't want to see everyone sitting at a desk scrolling twitter for 8 hours, so instead they do pointless meetings.
Matt Levine had a fun Great Recession story which I cannot find right now, which is that during 2008 in the M&A department at Goldman Sachs everyone still came to work, even though obviously merger and acquisition activity was way down. They would spend every day doing calls and making pitchbooks, all of which went nowhere. Goldman didn't close a deal for a full year. A floor full of people could have just collected a salary and stayed home for 12 months and it would have had an identical outcome.
[+] [-] scarface74|3 years ago|reply
[+] [-] wolverine876|3 years ago|reply
If businesses pull in their horns, stop supporting innovation, the economic result is easy to predict.
[+] [-] gz5|3 years ago|reply
1. Good people will be more available (there will be public company cuts and private cuts, as well as resignations, especially people working for companies in the Series B to Series D range (who raised those rounds at the old multiples) who will need massive growth/patience for their options to grow into the new multiples).
2. As businesses cut costs, those are opportunities for products and services which enable efficiency.
[+] [-] SkipperCat|3 years ago|reply
[+] [-] sokoloff|3 years ago|reply
It's quite possible that this era of that is over, but I'll eat my hat if another era of stupid money chasing silly ideas doesn't spring up within a decade.
[+] [-] altdataseller|3 years ago|reply
[+] [-] unknown|3 years ago|reply
[deleted]
[+] [-] Mimmy|3 years ago|reply
[+] [-] danielrhodes|3 years ago|reply
[+] [-] adamsmith143|3 years ago|reply
It's called the Business Cycle. Those days are not over, they're merely hibernating
[+] [-] unknown|3 years ago|reply
[deleted]
[+] [-] unknown|3 years ago|reply
[deleted]
[+] [-] checker659|3 years ago|reply
For a few years
[+] [-] candiddevmike|3 years ago|reply
Would've also been interesting if they had separate guidance for crypto startups.
[+] [-] nopenopenopeno|3 years ago|reply
[+] [-] quadcore|3 years ago|reply
[+] [-] gen220|3 years ago|reply
Interest rates are rising, to appease inflation.
As the interest rate goes up, allocators of capital have less appetite for risky allocations. This makes access to capital for VC firms becomes more competitive. This makes access to capital for "startups" becomes more competitive.
There's also a bigger macrotrend, which is another hangover from COVID: investment poured into the tech sector, which was booming during COVID. Investors over-bullishly priced-in the idea that this boom was, in fact, a new baseline or indicative of future exponential growth. As we recover from COVID, these pricings are increasingly revealed to be wrong as companies generally report post-COVID numbers that are closer to pre-COVID numbers.
This is bad for investors leveraged on tech. Therefore, it's bad for VCs that raised LP capital on the basis of COVID performance. Therefore, it's bad for companies that raised >20x ARR multiples on the basis of COVID performance.
Basically, it's a single or double whammy for most of the economy, but a double or triple whammy for unprofitable startups.
[+] [-] somewhereoutth|3 years ago|reply
Encourages resource mis-allocation, which means there is less stuff we actually need to go around.
We should have used fiscal policy more aggressively to fix the Great Recession, but that would entail taking money from rich people and giving it to poor people, and we can't have that can we?
[+] [-] rrrrrrrrrrrryan|3 years ago|reply
The wider economy isn't terrible. Inflation is rising and GDP is pulling back a little bit, but unemployment is low, and wages are mostly flat.
But the NASDAQ (comprised of mostly tech stocks) is down 26%+ year-to-date and falling. People on this forum mostly work in software, and this downturn will almost certainly shift the balance of power from unprofitable high-growth companies (especially crypto, Web3, etc.) to companies that actually make real money.
[+] [-] pyb|3 years ago|reply
[+] [-] TameAntelope|3 years ago|reply
[+] [-] quadcore|3 years ago|reply
[+] [-] drcongo|3 years ago|reply
Make an effort YC.
[+] [-] mcguire|3 years ago|reply
???
I get that it's twitter, but grammar is still a thing.
[+] [-] UncleOxidant|3 years ago|reply
[+] [-] rkagerer|3 years ago|reply
[+] [-] babelfish|3 years ago|reply
[+] [-] thecleaner|3 years ago|reply
Edit: I don't really think all YC backed companies think that low of employees.
[+] [-] mrlatinos|3 years ago|reply
[+] [-] MichaelMoser123|3 years ago|reply
I mean, i mean: is this one going to be worse than 2008?
Fortune magazine is trying to compare our current problems with 2008. They say that it might turn out to be worse, this time, as 2008 was merely a "black swan event", the difference being that inflation is coming "for real" right now. https://fortune.com/2022/03/26/great-recession-key-differenc... Also this:
So they might have to come up with a new name, if this one turns out to be worse. Maybe they should go for the "Even Greater Recession", abbreviated as EGR...Also the economists don't appear to have predicted it. Well, at least US Intel was right about the war in Ukraine...
[+] [-] MontyCarloHall|3 years ago|reply
[+] [-] rchaud|3 years ago|reply
and worst of all, c)pursuing a predatory pricing strategy to monopolize the market and crowd out competitors.
[+] [-] thecleaner|3 years ago|reply
[+] [-] SpicyLemonZest|3 years ago|reply
[+] [-] dredmorbius|3 years ago|reply
OCR'd text:
4:11
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:
1. No one cannot predict how bad the economy will get, but things don't look good.
2. 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.[1]
3. 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.
4. 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.
5. 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 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.
6. 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.
7. If you are post Series A and pre-product market fit,[2] don't expect another round to happen at all until you have obviously hit product market fit. The Series A Milestones[3] we publish here might even turn out to be a bit too low.
8. 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.
9. 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.
10. For more thoughts watch this video we've created: Save Your Startup during an Economic Downturn.[4]
Best,
YC
________________________________
Notes:
Presumed links (I do not have a copy of the original message). See also https://news.ycombinator.com/item?id=31436244
1. Default Alive: http://www.paulgraham.com/aord.html
2. Pre-product market fit: See: https://www.ycombinator.com/blog/ycs-essential-startup-advic... "do things that don’t scale: remain small/nimble"
3. Series A Milestones: Presumably private.
4. Save Your Startup during an Economic Downturn: https://yewtu.be/watch?v=0OVSTWozvfY?vq=hd720
[+] [-] ilamont|3 years ago|reply
Wonder how things will shake out for biotech. I know biotech investors have long timeline, but surely they are feeling pressure too ("LPs will expect more investment discipline")
[+] [-] glennon|3 years ago|reply
[+] [-] domvillela|3 years ago|reply