Y Combinator Warns Startups In 2022 To Plan For Economic Downturn

Startup accelerator Y Combinator is the latest investment firm to warn 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 don’t look good, ” YC wrote in a letter sent to its portfolio founders this week titled “Economic Downturn.” The contents of the letter were first reported by TechCrunch.

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

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

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

The venture market has already shown some softness, falling quarter to quarter for the first time in Q1 2022.

The slowdown in the private market is undoubtedly a reflection of the beating many public tech stocks including Netflix and Meta have taken in the public market. Such drops can make it harder for VCs to raise money from LPs, as well as lead some large growth firms to deploy their money in the public market instead of the private in search of bargains.

Added to the falling market are the ongoing issues with inflation, interest rates and geopolitical unease that have all made ventrue dollars harder to come by.

Y Combinator’s warning likely will resound in the startup community. The firm invests in hundreds of companies a year, and its portfolio is a who’s who of startup success stories such as Airbnb and Stripe.

The letter, while admitting no one can predict the future, paints a bleak year ahead. It warns founders that “it’s your responsibility to ensure your company will survive if you cannot raise money for the next 24 months.”

It goes on to say “if your plan is to raise money in the next 6 to 12 months, you might be raising at the peak of the downturn.”

In a ominous post script of the letter, the firm doubles down on its warnings: “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.”