Y Combinator, one of the most successful startup accelerators in Silicon Valley, is advising its portfolio company founders to “plan for the worst” as startups across the globe scramble to navigate a sharp reversal after a 13-year bull run. (Link at bottom)
The full letter is worthy of reading in its entirety, but the major theme is: assume a downturn, cut expenses, and don’t plan on raising any capital for the next 24 months.
Here’s another interesting bullet point:
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 slow down 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.
What an interesting criteria list! The inverse of that list sounds familiar. Domestic companies with high margins, asset light, selling software not things, quickly growing revenues and solid cash flow (or a strong plan to profitability).
These are some of the best minds in Silicon Valley coming to us with a warning of what companies top-tier investors avoid during a downturn.
What that in mind, here’s what I’ve done this morning. Try this out yourself.
- Read the YC letter. You’ll notice it reads almost like a precursor to Saul’s writings: https://techcrunch.com/2022/05/19/yc-advises-founders-to-pla…
- Read “Evaluating a company” in the knowledge base. Yes, even if you’ve done it a hundred times already: https://discussion.fool.com/knowledgebase-2019-part-1-34381924.a…
- Look at your holdings. Put their numbers and story under the microscope and judge them against these evaluation criteria. Now’s the time to address our own knowledge gaps. Now’s the time to scrutinize and define your conviction.
Be the top-tier investor that YC and Saul write about. The knowledge is all here.