VCs tell startups to ‘prepare for the worst’

Investors are preparing for economic hard times due to the ongoing war in Ukraine and increased inflation. Venture capital firms call on startups to cut costs. Additionally, companies are told to give up hope for new investment rounds.

Large venture capital (VC) firms such as Lightspeed Venture Partners, Craft Ventures, Sequoia Capital and Y Combinator have advised companies in their portfolio to put all hands on deck. Several media outlets report this, such as TechCrunch and the Wall Street Journal.

‘Chance of future investments extremely low’

The VC-firms have told tech companies to preserve money and lower costs, for example. In addition, starting businesses should not expect large, new funding rounds. Y Combinator, an incubator from Silicon Valley that funded Dropbox and Airbnb early-stage, is one of them.

The incubator sent founders a letter earlier this month saying to ‘plan for the worst’, according to TechCrunch. Companies have to extend their runway to 24 months within 30 days, Y Combinator writes. In other words, starting businesses have to get by for 2 years without fresh funds. Startups that are not self-sufficient or profitable, should take money from existing or new investors now in preparation for worse times.

“We recommend you change your plan.”

“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.”

Layoffs at Gorillas, Klarna and Netflix

Several tech companies have taken this advice to heart. There have been big layoff rounds at flash deliverers Getir and Gorillas. The same goes for payment service Klarna, which recently experienced a 30 percent valuation drop. At Facebook, there is currently a hiring stop.

The last few years startups have raised record funds.

In contrast, startups have been raising record funds over the last few years. In 2021, tech companies raised close to 600 billion euros. That is a whopping 92 percent year-on-year growth compared to 2020. That is to say, a lot of money goes into these companies. Startups are now called upon to use it wisely.

Y Combinator writes in their letter: “(…) economic downturns often become huge opportunities for the founders who quickly change their mindset, plan ahead, and make sure their company survives.”