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GUEST BLOG. The apocalypse is coming, at least according to one of the biggest startup accelerators in the world. AY Combinator this week sent an email to the founders of accelerator companies, advising them to ‘plan for the worst’ as market turmoil has led to many companies laying off workers, implementing rather draconian cost-cutting measures and slowing hiring. .
Who is the Y Combinator (YC)?
First of all, who is the Y Combinator? As per Wikipedia: Y Combinator (YC) is an American technology startup accelerator launched in March 2005. It is behind the launch of over 3,000 startups including Stripe, Airbnb, Cruise, DoorDash, Coinbase, Dropbox, Twitch and Reddit. The combined valuation of its top companies was over $300 billion as of January 2021. According to Forbes, YC is one of, if not the most successful accelerators in Silicon Valley.
The letter at a glance
The beginning of the letter is a reminder that no one can predict how bad the economy will go, but right now it clearly doesn’t smell good.
In this context, the investment firm suggests that start-ups reduce their expenses and focus on increasing their “track” in the next month. In the start-up world, “runway” refers to the number of months the company can continue operating before it runs out of cash.
According to YC, if you can’t get enough money in the bank to survive for the next 24 months, it’s crucial to get yourself into fundraising mode now. “If your plan is to raise funds in the next 6 to 12 months, you will likely do so at the height of the recession,” YC said in his letter. Remember that your chances of success are extremely low, even if your business is doing well. Especially as the poor performance of tech companies in public markets has a significant impact on venture capital investments. In fact, during economic downturns, even major venture capital funds with a lot of money slow down their investment (smaller funds often stop investing or die). Also, most will put more aside to support their best investment during the crisis.
It’s not the norm.
YC also reminds entrepreneurs who founded their start-up in the last five years that this period was clearly not the norm and that their fundraising experience was likely not normal and that future fundraising will be much more difficult. Personally, I don’t know many entrepreneurs who haven’t been surprised in recent years to receive offer letters with business reviews 2-3x what they themselves thought (and entrepreneurs are usually already quite excited during their review).
Every crisis brings opportunities
A good saying goes that above all you shouldn’t waste a good crisis! This is clearly my point of view as well. On its own, COVID-19 was devastating for Connect&GO, wiping out almost all of our revenue. However, it was also the best time to spin around and build a world class product that today has brought us back to the peak of our earnings! This is also what YC reminds its founders: “Remember that many of your competitors don’t plan well, maintain a high level of spending, and will only understand they’re screwed when they try to make the next round. liquidity. You can often gain significant market share during an economic downturn simply by staying alive. »
Finally, the note ended with a link to a 35-minute Y Combinator YouTube video titled “Saving Your Startup During an Economic Recession”: https://www.youtube.com/watch?v=0OVSTWozvfY.
What if this crisis was a good thing?
It’s not the first time we’ve seen venture capital funds issue warnings of this kind. The situation was quite similar at the start of the COVID-19 crisis, when most investors temporarily froze their investments and urged all startups to be very cautious before massively accelerating their investments, often hitting company valuations of more than 18 times. the recipe .
For my part, I believe that this crisis will simply clear things up. The valuations were clearly overrated and, for one of the first times since I founded Connect&GO, it was “easy” to get venture capital funding: that’s not normal. The tech hypergrowth scene has always been very selective and elitist and only the best teams with the best products have a chance of being selected: that’s not bad at all!
I also continue to believe that if you have the right elements, crisis or not: you will raise funds! However, you will have to be more rational with your expectations and your requests, which will also lead entrepreneurs to really think about whether it is a good idea to go into venture capital compared to other sources of funding.
For Connect&GO, after being the hardest-hit sector during COVID-19, we are very positive for the years to come. While entertainment is not immune to a new wave, this industry is generally resistant to recessions and, more than ever, people need to change their minds!