- Y Combinator Warning Letter To Founders
- Their Role In Startup Valuations & Correction
- Metrics To Focus On From Craft Ventures
- Advice For Startups Moving Forward
#ycombinator #yc #craftventures #startupvaluations #recession #marketcrash #startups #fundraising #seriesa #seriesb #seedround #seedfunding
YC's message to founders: pic.twitter.com/Yky14U6xBh
— Manish Singh (@refsrc) May 19, 2022
Hello hello Tyler Bryden. Here you know what I think I’ve started this at a very sort of weird daily stand up thing at a very weird time in history. A lot of stuff going on right now and I feel like I’m the bearer of bad news. I’m not really the bearer of bad news, I’m just an amplifier of it I guess, and I hope one day I can talk about unicorns and ponies and all the wonderful, optimistic things in the world. But for now, let’s talk about darkness. Let’s talk about interest rates. Let’s talk about recessions. These are the things that are truly impacting us day to day. Right now, so I am, you know, addressing some of these things and there’s a topic that I wanted to talk about today that actually came sort of last week and it was a letter to founders from Y Combinator. Why Combinator is, you know, widely regarded as the most sort of credible accelerator program you can see just some of the incredible names that they have funded and have produced many, many unicorns. I guess deck acorns. And because of this they also sort of in.
Embrace and they also sort of illustrate this Silicon Valley culture. Of these, you know, grow or die as, as I’ve seen in a super pumped here, the Stevie Show mentality where you must become a billion dollar company and they’re funding you to make that happen. And throughout you know history. They’ve had different terms. At one point, I believe it was $20,000 for 6% of the company that was then changed to one 2500 and 25,000, and then has moved a new deal, which I believe offers another 375 or 500,000 at an uncapped, safe and so.
You know I have had some friends who have gone through this program doesn’t necessarily mean you’re going to, you know, succeed. There are many YC companies that have failed. There is a huge failure right in startups as a whole. But you know, in a in the wide combinator vein they are setting you up for success the best way they can. Connecting with alumni and then also sending a deal signal to investors that they have vetted and qualified you so that you are a great.
Company to invest in so after a demo day the friction to fundraising is often decreased compared to a company that hasn’t gone through NYC or maybe less credible accelerator. So this letter itself I can pop up here is, you know, it’s interesting you. You read this as a. There’s some people who are reading this as what YC funded companies. Probably scary enough to get that message, and then there’s other people who are reading that you know for myself who are not YC funding companies. And then it’s also scary, maybe even more scary because you don’t have the support of YC and no one’s really sending you this message. You just come across it on the Internet. I will say that there are, you know, just to check myself. There may be some bias as I’m going through this conversation here. I have applied for YC. I’ve actually gone to the interview process and even you know, gotten close to getting in but never actually went in. So if I feel if I sound related, I don’t think I am, but I just wanted to disclose that bias here as I as I walk through this so they’ve done a lot of office hours with companies and this is, you know, one thing I’ll say I love is is numbered less. I think that in an email exchange and communication, it’s one of the best ways to communicate because if you need to respond back you can just address that with the corresponding number and make sure that the the information is is well structured and organized so you can continue to go back and so.
Anyways, love the love. The number here and just a couple sort of. Insights or thoughts that have come out of it. There’s also a couple slides I’m going to show you from a craft ventures, which is David Sachs Company where with which they shared with with their founders too. And so generally.
They are talking about. That that if you are have have gone through and raised in this climate that was maybe 2020 to 2021, that this climate is not no longer existent, and it’s really interesting because we’re getting mixed signals. Right now, there are. There are funds that are raising significant funds. Maybe they closed those awhile ago and are just announcing them now. So there is still continued to be injection of capital and investors. There’s some investors who are saying it’s even, you know, it’s a great time to invest. There are companies Lang.
People off Bolt just laid off. I think 700 people klarna a bunch of other companies and I’m guessing it sort of becomes like a little bit of a. You know, not for lack of better term, a pandemic that actually happens here, where once there are some layoffs and one company and other company sees that validates that this is the right thing to do, and it will continue. So there’s that side of it as well. And then there are still companies that I’m seeing who, you know, I followed who are raising successful rounds. And again, maybe they’re just announcing that now or you don’t get the behind the scenes of that. They lowered their valuation or they you know, did X on those terms to make this happen.
So you don’t necessarily get that, so you’re getting a lot of. I would say conflicting signals right now, but then you are getting a strong signal from Y Combinator, who obviously has a high level oversight and perspective on this and most likely some good insight. And obviously a reason to put this together. So a couple common threads that I’ve heard throughout this email throughout conversations throughout some of the presentations I’ve been part of is that 24 to 30 months. Is what you should be looking at from a runway perspective because.
The because the environment is so volatile right now that is necessary for you to to survive. Through that journey without having to raise again, and with that the goal is to not have to raise again, because you’re likely going to take at least a 50% valuation cut. And for most investors that’s, you know that’s not going to be a ideal scenario who put money into your company even with their understanding of the circumstances. And it’s not a deal from you. You are going to have create problems with those investors. You’re going to dilute your company and you’re going to decrease the valuation of your company and actually impact the employees who are on your.
Game as well as if you’re a Co founder or founders, you’re going to impact your own sort of equity in the company here as well too. Yeah, they’re signal that we’ve seen through this has been recently. I’ve talked about it yesterday with Snapchat and other things like there will be a slowdown and buying and companies will look at cutting off software subscriptions that are not essential to their growth or cost savings of their business. So a lot of these messages are elaborated in this. Email specifically, I’ll share this as a link so you can check it out and then I just wanted to touch on a note that now has sort of arised, which is I think a really interesting question which is.
What is why combinators role in this startup correction and from my experience what I’ve? Seen here has been so yeah, so who’s the blame for the bloated early stage valuations of 2021? As someone who’s applied for YC, who’s building companies and then following other companies the best I can. Friends who have gone through this. There are companies in all different stages. Maybe they have connections, or maybe they just have very good narratives and their story who have been able to get into YC and then raise out of 30 million pre money valuation immediately after three months after they get out of. Why combinator?
With maybe no product, no real traction and nothing but the signal from why Combinator that they are worthwhile to investing in. And when there was so much capital in the market and then YC is creating this signal for investment, all those money then pours into these companies. They are overvalued while YC makes many good bets that turn out to be successful. They also make. Congrats too, and while maybe these companies can put together a good narrative or story, it doesn’t necessarily mean that they’re building a business that is essential that will grow that will be successful in the long run, and so over the next year. Couple years, we’re going to see a lot of these companies that raise that super high valuations, super high multiples. They will fail and fail, probably quite spectacularly, because of the overvaluation here and with that.
Well as white csets valuations then then other companies, and even if they’re not going through that program. Or maybe their second time founders or have credibility. They’re then also using those valuations as benchmarks for their own race, so then everything gets pushed up and we had that same experience where we got some term sheets for our company and they were not matching the expected valuation that we thought based on what we were seeing in the market. We said no to those. And and then that has downstream consequences too. So there are companies that didn’t take funding that now probably wish they had took funding, even if it wasn’t a devaluation that they thought. Then there was companies that took funding at too high of a valuation which will not be able to return that investment, and they would have to X times their annual revenue to even match the investment at the baseline of like sort of SAS multiples the way they are now. So I get very sort of.
You know interesting time and that signal directly from Y Combinator. Another piece here is this default alive, which is. You know, there’s this idea of can you survive without raising money? There’s another variation of the on this. Do you have the metrics required to raise that money? And then then you can also sort of consider yourself in that bracket and I’m going to pull up a slide here.
From David Kraffts venture piece here. And let me see why this isn’t my slack, so I’ll pull this up here. You can see Lauren and I sharing some links here, but fundraising bar is higher but still possible. But with that you need to have sort of these metrics in place to make that happen. So if you are in great, it’s still possible. Still not an ideal situation to raise money if you’re in the good. Again, still possible, but you’re going to have a more difficult time. And then at these metrics you are definitely in the danger zone.
You most likely will not be able to raise money, and if you are it’s going to be on very poor terms. And then one other note from this is like be open to lower valuations, which no one is willing to hear. Probably investors aren’t liking to say, but you have to give the proper advice and the right time. And then they actually go at the higher level of the 30 months runway. So what we’re seeing now is you said modify your hiring plans, layoff people if necessary, high freeze or hiring. We’re already seeing this at bigger companies as well too, that we don’t necessarily think are.
That or that we think are immune to some of these things which we find out isn’t true, especially in the environment that we, in talking about a burn multiple. So how much are you burning each month? And then you need to act fast. And so I think we are starting to see now companies maybe not acting super super fast, but now with all this information all these signals this message from YC the layoffs are starting to happen. Modifications to the business are happening. Companies are talking about moving towards profitability to leave the one.
Like I’m going blank on the name here, but the one food delivery company talked about getting towards profitability and pulled out of different countries because they’re aggressive. Growth plans just print them at such a risk with their burn rate and then their inability to raise capital. So we are in a very interesting climate here right now with signals, sort of diverging and giving people different insights or thoughts about how they should best proceed. But overall some of the over overarching advice has been to again increase runway decrease. Learn modify your hiring plans. Raise only if you have to and be low open to lower valuations. If you are and then focus on profitability or at least break Even so that you can continue to grow and that this is not your death warrant in this time. So that is my little breakdown of YC’s letter to founder. Some insights that I’ve thought threw up and then some nice messages from not. I guess. Not nice messages, but some insights from craft ventures and David Sachs.
There and then also just some thoughts about why. Or or how has Wisc contributed to the climate that we’re in with these super high valuations with companies that might not deserve those? So keeping, you know, keep following this stuff if you’re interested in it. Send me a message. Always love to love to chat about this and hope everything, despite everything that’s going on in the world right now as well. And in your world. And I appreciate you checking this out very much, bye.