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GUEST BLOG. The apocalypse is coming, at least according to one of the biggest startup accelerators in the world. Y Combinator this week sent an email to the founders of the accelerator companies advising them to ‘plan for the worst’ as market turmoil has prompted many companies to lay off, implement reduction measures in cost and in slowing down hiring.
Who is Y Combinator (YC)?
First of all, who is Y Combinator? According to Wikipedia: Y Combinator (YC) is an American technology start-up accelerator launched in March 2005. It is behind the launch of more than 3000 start-ups including Stripe, Airbnb, Cruise, DoorDash, Coinbase, Dropbox, Twitch and Reddit. The combined valuation of its leading companies was over $ 300 billion in January 2021. According to Forbes, YC is one of, if not the most successful accelerator in Silicon Valley.
The summary letter
The beginning of the letter is a reminder that no one can predict how bad the economy will be, but so far it is clear that it is not fragrant.
In this context, the investment company suggests that start-ups reduce their costs and focus on increasing their “runway” next month. In the world of start-ups, “runway” refers to the number of months a business can continue to operate before it runs out of money.
According to YC, if you don’t have enough money in the bank to survive for the next 24 months, it’s important to put yourself in fundraising mode now. “If your plan is to raise funds over the next 6-12 months, you will likely do so at the height of the recession,” YC said in his letter. Remember that your chances of success are very low even if your business is working well. Especially since the poor performance of technology companies in public markets has a huge impact on venture capital investments. In fact, during an economic downturn, even the leading VC funds with a lot of money slow down their capital deployment (often stopping investing or smaller funds die). In addition, most will set aside more to support their best investments during the crisis.
YC also reminds entrepreneurs who have established their start-up in the past five years that this period is clearly unusual and that their fundraising experience is likely to be abnormal and that future fundraising is it will be more difficult. Personally, I don’t know many entrepreneurs who haven’t been surprised over the past few years to receive offer letters with business appreciations 2-3x what they thought themselves (and often, entrepreneurs are pretty enthusiastic in their analysis).
Every crisis brings opportunities
A good saying goes that above all you should not waste a good crisis! This is also clearly my point of view. By itself, COVID-19 is devastating for Connect & GO, eliminating almost all of our revenue. However, this is also the best time to pivot and develop a world-class product that now puts us back on top of our earnings! This is also YC’s reminder to its founders: “remember that many of your competitors don’t plan well, maintain a high level of spending and will only understand that they are broken when they try to make their next round. financing, not having enough liquidity. You often gain significant market share during an economic downturn just by staying alive. »
Finally, the note ends with a link to a 35-minute Y Combinator YouTube video titled “Saving Your Startup During the Recession”: https://www.youtube.com/watch?v = 0OVSTWozvfY.
What if this crisis was a good thing?
This isn’t the first time we’ve seen venture capital funds issue these types of warnings. The situation is quite similar to the start of the crisis in COVID-19 when most investors temporarily freeze their investments and urged all start-ups to be very cautious before then massively accelerating their investments. typically reaches the values of companies at more than 18 times revenue.
For my part, I believe this crisis will only correct the record. Valuations are clearly overrated and for one of the first times since I founded Connect & GO, it’s “easy” to get venture capital funds: it’s not normal. The tech hypergrowth scene has always been very elite and elitist and only the best teams with the best products had a chance to be selected: that’s not a bad thing!
I also continue to believe that if you have the right elements, crisis or not: you can raise funds! However, you need to be more reasonable in your expectations and your requests, which will also lead entrepreneurs to really think about whether it is a good idea to take out venture capital compared to other sources of financing.
For Connect & GO, after being the industry’s hardest hit during COVID-19, we are very positive over the next few years. While entertainment will not remain immune to a new wave, this industry is generally resistant to recessions and more than ever, people need a change of heart!