YC To Entrepreneurs: Prepare For The Worst

Original title: "YC advises founders to 『plan for the worst』 amid market teardown"

Original source: TechCrunch

Original compilation: 0x9F, Rhythm BlockBeats

Hello YC Founders:

We spoke to a ton of YC portfolio companies this week. They proactively ask whether spending, life cycle, recruiting and financing should be adjusted according to market conditions. We tell them: Recessions are often an opportunity for founders who change their minds quickly, prepare ahead of time, and ensure their company survives.

As you develop your plan, consider the following ideas:

1. No one can predict how bad the economy will get, it's not going to be good anyway.

2. The safe course of action is to prepare for the worst. If the current situation is as bad as the previous two recessions, the best way to deal with it is to cut spending in the next 30 days to extend the life cycle. Your goal should be Default Alive (keep alive by default).

3. If you don’t have enough capital to survive and there are investors who are willing to give you more money now (even if the financing terms are the same as your last round), you should firmly consider accepting this money.

4. Regardless of your financing ability, it is your responsibility to keep your company alive even if you cannot raise money for the next two years.

5. Understand that the poor performance of technology companies in the secondary market will seriously affect VC investment. VCs will have a harder time raising money, and their LPs will ask them to invest more carefully. The result is that during recessions, even the top VCs with a lot of money slow down their investment pace (smaller funds often don't invest or fail). This reduces competition among funds for deals, which translates into lower company valuations, smaller financings and harder deals to close. In these cases, investors also reserve more funds to back their best-performing companies, further reducing the amount of new financing. This slowdown will disproportionately affect multinationals, asset-heavy companies, low-margin companies, hard technology companies, and other companies with high investment and long payback times. As a reminder, although the total amount of investment has decreased, there are still many opportunities to meet investors. You'd be foolish to think they're still actively investing.

6. Those who have started companies within the past 5 years, ask yourself what do you think the normal funding environment looks like. The vast majority of financings you've experienced have been out of whack, and future financings are going to be tougher.

7. If you have passed the A round of financing, but the product has not yet reached the PMF (Product-market fit), do not expect a new round of financing until the PMF is clearly achieved. The A-round small goals we mentioned here may be a bit too low.

8. If you plan to raise capital in the next 6-12 months, that's right at the peak of the recession. Even if the company does well, your chances of success are extremely low. We recommend that you change your plans.

9. Remember that many of your competitors will not plan well and will continue to spend money until they find themselves screwed when trying to raise their next round. When the economy is bad, as long as it survives, it can usually occupy a huge market share.

10. For more perspective, watch the video: Saving Your Startup in a Bad Economy

Best regards, YC