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YC advises founders to ‘plan for the worst’ and reach default alive

By Abhishek Goel 24th May 2022

Y Combinator, a well-known startup accelerator, has written an email to its alumni network of businesses, warning them about the impending economic slump and the financial implications that might affect even the greatest startups.

If your aim is to raise money in the next 6-12 months, you could be raising during the pinnacle of the slump, the message added, according to the Economic Times. Even if your firm is going well, keep in mind that your prospects of success are quite slim. YC advises founders to modify their plans.

As businesses around the world try to manage a steep downturn following a 13-year bull run, Y Combinator, a Silicon Valley kingmaker, is telling its portfolio entrepreneurs to “plan for the worst.”

The investment group, whose early investments include Dropbox, Coinbase, Airbnb, and Reddit, advised entrepreneurs this week to decrease costs and focus on lengthening runways over the next 30 days. Those who don’t have enough time to “reach default alive” may consider soliciting funds, according to YC.

The message from YC, which invests in hundreds of young firms each year, is an indication that the market rout that has reduced the value of a huge number of digital companies in recent weeks, including giants like Shopify and Netflix, is now affecting the early-stage startup sector.

Now, the question that arises is is the situation really this bad? Will startups shut down? Let’s read what the experts say about this. A breakdown of Y Combinator’s message by TechCrunch 

How founders can make a plan from here – Things to consider

Experts say that economic downturns are frequently turned into great opportunities for entrepreneurs who quickly shift their mindset, prepare ahead, and ensure that their business survives. 

  1. It’s best to prepare for the worse. If the present scenario is as catastrophic as the last two economic downturns, cutting expenses and extending your runway within the next 30 days is the best approach to prepare. It should be your objective to reach Default Alive, as per the Y combinator.
  2. You should seriously consider taking it if you don’t have the runway to avoid default and your existing or new investors are prepared to offer you more money right now (even on the same conditions as your prior round).
  3. It is your obligation to guarantee that your company will continue if you are unable to gather funds for the following 24 months, regardless of your fundraising skills.
  4. Understand that the bad public market performance of technology businesses has a big influence on venture capital investing.
  5. 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 fundraising will be much more difficult.
  6. If your plan is to raise money in the next 6-12 months, you might be raising at the peak of the downturn. Even if your company is doing well, keep in mind that your chances of success are relatively slim. YC advises you to adjust your plans.
  7. 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.

Here’s a detailed explanation of default alive and other things you can do to save your startup during an economic downturn. 

Final thoughts

This letter from Y combinator has surely put an alarm for founders to plan their business strategies in this economic downturn. Founders are advised to keep certain things in mind while thinking about fundraising or expanding their businesses. A while back, Wall Street Journal published an article, where it was stated that for tech startups, the party is over.

This suggests that this downturn has affected businesses to their roots. Businesses are cutting costs, extending their runways, laying off employees, and more to keep their companies afloat.

On the other hand, recessions often present opportunities to entrepreneurs who quickly alter their mentality, prepare ahead, and ensure that their business survives. It’s time for the founder to take a pause and rethink their business strategies.

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