As the global economy crawls on the path to recovery after the pandemic-induced economic crisis, startups across the globe are facing significant difficulties in securing funding. At a time when startups are resorting to mass layoffs to save cash amid the funding crunch, American tech startup accelerator Y Combinator has cautioned its portfolio companies to undertake significant steps to cut costs within the next 30 days.
What Has Happened So Far?
Startups have been on a layoff spree since the beginning of this financial year. Companies globally have been forced to take tough steps to mitigate the risks of the crisis facing the global economy. In April alone, more than 1,800 contractual and full-time employees got laid off in the ed-tech sector across India. While several companies continue to reel under the meltdown in technology stocks globally, most of the are yet to find a way out of it. This is when Sequoia Capital warned of a prolonged global economic slowdown capable of altering the business environment. It advised companies to take steps to cut costs, revise forecasts and preserve cash in an editorial from 2020.
Y Combinator’s Eye-Opening Mail To Founders & VCs
A stinging and blunt email from Y Combinator to the founders of its portfolio companies is doing rounds on the internet. In the mail, Y Combinator has strictly advised the decision-makers to preserve cash while listing several steps to mitigate the risks of the economic crisis. “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,” Y Combinator says while coining a term called ‘Default Alive’. The term has been used to refer to startups that can run profitable before running out of funds. Y Combinator uses factors like current expenses, cash on hand, and growth rate to make the classification.
Key Takeaways From The Mail
- Predicting the future is extremely tricky at this time and companies must prepare for the worst as the outlook is certainly “not good”.
- Startups should focus on achieving the status of Default Alive through cost-cutting and fund preservation amid a significant decline in funding.
- Companies struggling to reach the Default Alive status should consider taking any available funding, even if it means securing funds on terms the same as the last round.
- Raising funds is going to be more difficult for startups that started in the last 5 years.
- Companies that are post-Series A and pre-product-market fit are unlikely to secure another round of funding until the product is a market hit.
- For companies planning to raise funds in the next six to twelve months, chances of success are extremely low as they might be raising at the peak of the downturn.
Funding Slowdown In Crypto Market
The collapse of Terra Luna is likely to have a lasting impact on crypto startups. Moreover, the decline of funding in the technology sector is likely to be transferred to the blockchain and crypto sectors. Declining trading volume could also be a major factor contributing to funding slowdown in the crypto sector. Events like the collapse of a stablecoin are likely to affect the confidence of investors in the crypto economy. While it is extremely tricky to speak of the future at this point in time, crypto startups and tech startups are up for a tough time.