Y Combinator’s advice for startups in the face of the crisis

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Y Combinator's advice for startups in the face of the crisis

Bloomberg Line – The economic slowdown will have a disproportionate impact on international companies (outside the United States)asset-heavy companies, low-margin companies, hard tech, and other companies with high consumption and a long time to generate revenue, warns Michael Seibel, CEO of AND Combiner in the letter he sent to the global community of the world’s largest business accelerator.

Faced with falls in the stock markets on a global scale, inflation, high interest rates and the effects of the war between Russia and Ukraine, the world macroeconomy is not at its best and this may affect emerging companies. Therefore, to prevent them, Michael Seibel sent a letter to his community.

Y Combinator has accelerated around 4,000 startups in 17 years in 20 countries.

In the most recent batch, from winter 2022, 411 startups were presented, of which 34 are Latin American. Namely, 8.1% of accepted startups originated from the region; the fourth geographical area with the highest representation after North America with 54.6% of selected startups, Asia with 18.4% and Europe with 11.2%.

The macroeconomic crisis has unsettled startup founderswho have approached Y Combinator to ask if they should change their plans around spending, hiring, and funding rounds based on the current state of the public markets.

Seibel warned in his letter that: “No one can predict how bad the economy will get, but things are not looking good. 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.”

Bloomberg Line asked Y Combinator if there is any special warning for the Latin American startup market and responded that the message applies to all regions of the world.

Why should startups worry?

Poor public market performance of technology companies significantly affects venture capital investment. Venture capitalists will have a much harder time raising money, Seibel explained.

In recent days, in which the quarterly reports of the large technology companies have been released, there have been constant drops in shares of public companies that could have a ripple effect on startups with similar business models.

And it is that, “during economic downturns, even deep-pocketed blue chip venture capital funds slow their capital deployment (smaller funds often stop investing or die). This causes less competition between funds for trades, which translates into lower valuations, smaller round sizes, and far fewer completed trades. In these situations, investors are also setting aside more capital to support their best-performing companies, further reducing the number of new financings.”

Seibe ​​clarified that: “If your plan is to raise money in the next 6-12 months, you may be raising it at the height of the recession. Remember that your chances of success are extremely low, even if your company is doing well. We recommend you change your plan.

Because of this, he advised that founders need to make sure their company survives if they can’t raise money for the next 24 months.

What to consider at each stage?

For those who started their business in the last 5 yearsHe recommended asking what they think the normal fundraising environment is. “Most likely, your fundraising experience was not normal and future fundraisers will be much more difficult.”

If the startup is post-Series A and is market fit before product, he advised not to wait for another round to occur until product market fit has been reached. And if it is prior to series Aseries A milestones might even prove too low, he warned.

But not everything has to be negative, Seibel also noted that “economic downturns often turn into big opportunities for founders who quickly change mindsets, plan ahead and make sure their company survives.”

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