Y Combinator warns startup founders that 'things don't look good' in the economy right now — and shares 8 tips to survive a downturn

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Y Combinator warns startup founders that 'things don't look good' in the economy right now — and shares 8 tips to survive a downturn
iStock; Tetra Images/Getty; Gueholl/Getty; Anthony Redpath/Getty; Savanna Durr/Insider
  • Y Combinator told startup founders that "things don't look good" in public markets right now.
  • The California-based startup incubator gave them 8 things to do in a downturn.
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Silicon Valley's most famous startup incubator chimed in on the state of the public markets, warning founders that "things don't look good."

In an email sent to company founders, Y Combinator — which has birthed the likes of Airbnb, Coinbase, and Stripe — said a "large number" of its portfolio companies have reached out for advice on how to react to the current economic climate and stuttering stock values.

"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," the email said.

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The email was shared with a TechCrunch reporter, who posted it on Twitter. YCombinator didn't immediately respond to a request for comment.

Some economists have warned the US may be heading into another recession, albeit a mini one that will likely be very different than the last two. Experts previously told Insider that a looming recession would be more like a correction to compensate for months of large amounts of spending.

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YC gave founders 8 things they could do to survive the downturn:

1. 'Plan for the worst'

This is the "safe move," according to YC.

"If the current situation is as bad as the last two economic downturns, the best way to prepare is t cut costs and extend your runway within the next 30 days. Your goal should be to get to Default Alive," a term referring to startups that can become profitable before running out of cash.

2. Consider accepting more funds

"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," the message reads.

3. Money or not, the onus falls on you

"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."

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4. Optics could influence VC investments

"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."

YC noted that top-tier funds typically slow down capital deployment during economic downturns and put cash toward their best-performing companies instead, leading to lower round sizes, lower valuations, and fewer deals.

In the first quarter of 2021, venture funding slowed about 19% from the previous quarter, according to data from CBInsights.

5. Reevaluate what you think is 'normal' in the fundraising world

"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."

6. No more cash until you hit product market fit

"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. The Series A Milestones we publish here might even turn out to be a bit too low."

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7. If you're planning on raising money soon, don't

"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."

8. Just stay alive

"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."

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