Y Combinator warns startups in 2022 to plan for economic downturn

Startup accelerator Y Combinator is the latest investment firm to warn that the good times may be coming to an end for startups and the venture market.

“No one can predict how bad the economy will get, but things are not looking good,” YC wrote in a letter sent to his portfolio founders this week titled “Economic Recession.” The content of the letter was first reported by TechCrunch.

“The safe move is to plan for the worst,” Accelerator wrote.

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The letter comes just a week after SoftBank announced that it would become much more selective in investments after announcing a loss of $27.7 billion in investments in its Vision Fund for its just ended fiscal year.

Earlier this year, reports emerged that large crossover firms like Tiger Global and D1 Capital were also pulling back on late-stage investments.

The risk market has already shown some weakness, falling quarter-on-quarter for the first time in the first quarter of 2022.

The slowdown in the private market is no doubt a reflection of the beating that many public tech stocks, including Netflix and Meta, have taken in the public market. Such declines can make it difficult for venture capitalists to raise money from LPs, as well as cause some high-growth companies to pour their money into the public rather than the private market in search of bargains.

Adding to the market slump are ongoing problems with inflation, interest rates and geopolitical unrest that have made risky dollars harder to come by.

Y Combinator’s warning is likely to resonate with the startup community. The firm invests in hundreds of companies a year, and its portfolio is a who’s who of startup success stories like Airbnb and Stripe.

The letter, while admitting that no one can predict the future, paints a bleak year ahead. He warns founders that “it’s your responsibility to make sure your company survives if you can’t raise money for the next 24 months.”

He goes on to say “if your plan is to raise money in the next 6-12 months, you may be raising it at the height of the recession.”

In an ominous postscript to the letter, the firm doubles down on its warnings: “If for any reason you believe this message doesn’t apply to your business or you’re going to need someone to tell you in person to believe it…re-evaluate your beliefs monthly to make sure you don’t.” Don’t take your business off a cliff.

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Illustration: Li-Anne Dias.

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