Despite being incredibly selective (with an approval rate of roughly 1.5%), about 20% of YC (Y Combinator) start-ups have already failed.
Since 2016, when Y Combinator made its first investment in Nigerian-based Flutterwave, it has not looked back. It now counts 30 Nigerian tech companies as part of its portfolio. The start-up accelerator runs two categories of funded projects each year, known as the summer (S) and winter (W) batches, and some beneficiaries have included Nigerian-owned start-ups such as 54Gene, Mono, Paystack, Flutterwave, and Helium Health, among others.
Y Combinator, founded in March 2005, is a well-known start-up accelerator that selects tech start-ups to participate in its programme twice a year.
Seed funding is the accelerator’s earliest stage of venture funding and is often used to cover companies’ expenses. While some companies just require seed investment, others require multiple rounds. For this reason, ten start-ups that received funding from Y Combinator are being highlighted in terms of their expansion and acquisitions.
Believe it or not, this is before the little downturn we’ll be talking about. The statistic stated at the intro of this piece is normal and is almost expected.
Should you be more worried as a start-up? How do we navigate the new normal? What new normal are we even talking about?
The letter from Y Combinator warning start-ups to prepare for the worst stated:
Greetings YC Founders,
During this week, we’ve done office hours with a large number of YC companies. They reached out to ask whether they should change their plans around spending, runway, hiring, and funding rounds based on the current state of public markets. 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 Accelerator’s advice is due to the global economic recession. The email went on to explain that start-ups need to minimise expenses and restructure their strategies.
“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.”
As a start-up, how do you move forward given this new constraint? As per the letter, here are some thoughts to consider while making your plans.
- No one can predict how bad the economy will get, but things don’t look 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. Your goal should be to get to Default Alive.
- 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.
- 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.
- 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. As a result, during economic downturns even the top tier VC funds with a lot of money slow down their deployment of capital (lesser funds often stop investing or die). This causes less competition between funds for deals which results in lower valuations, lower round sizes, and many fewer deals completed. In these situations, investors also reserve more capital to backstop their best-performing companies, which further reduces the number of new financings.
This slowdown will have a disproportionate impact on international companies, asset-heavy companies, low margin companies, hardtech, and other companies with high burn and long time to revenue.
Note that the numbers of meetings investors take don’t decrease in proportion to the reduction in total investment. It’s easy to be fooled into thinking a fund is actively investing when it is not.
- 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.
- 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. If you are pre-series A, the Series A Milestones we publish here might even turn out to be a bit too low.
- 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.
- 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.
- For more thoughts watch this video we’ve created: Save Your Startup during an Economic Downturn.
Adding to this, Y Combinator stated: “PS: If for whatever reason you don’t think this message applies to your company or you are going to need someone to tell you this in person to believe it… please reassess your beliefs on a monthly basis to make sure you don’t drive your company off a cliff. Also, remember you can always reach out to your group partners.”