Greetings YC Founders,

During this week we’ve done office hours with a large number of YC companies. They reached out to ask whether they should change their plans around spending, runway, hiring, and funding rounds based on the current state of public markets. What we’ve told them is that economic downturns often become huge opportunities for the founders who quickly change their mindset, plan ahead, and make sure their company survives.

Here are some thoughts to consider when making your plans:

1. No one can predict how bad the economy will get, but things don’t look good.
2. The safe move is to plan for the worst. If the current situation is as bad as the last two economic downturns, the best way to prepare is to cut costs and extend your runway within the next 30 days. Your goal should be to get to Default Alive.
3. If you don’t have the runway to reach default alive and your existing investors or new investors are willing to give you more money right now (even on the same terms as your last round) you should strongly consider taking it.
4. Regardless of your ability to fundraise, it’s your responsibility to ensure your company will survive if you cannot raise money for the next 24 months.
5. Understand that the poor public market performance of tech companies significantly impacts VC investing. VCs will have a much harder time raising money and their LPs will expect more investment discipline.

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.

Note that the numbers of meetings investors take don’t decrease in proportion to the reduction in total investment. It’s easy to be fooled into thinking a fund is actively investing when it is not.

6. For those of you who have started your company within the last 5 years, question what you believe to be the normal fundraising environment.  Your fundraising experience was most likely not normal and future fundraises will be much more difficult.
7. If you are post Series A and pre-product market fit, don’t expect another round to happen at all until you have obviously hit product market fit. If you are pre-series A, the Series A Milestones we publish here might even turn out to be a bit too low.
8. 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.
9. Remember that many of your competitors will not plan well, maintain high burn, and only figure out they are screwed when they try to raise their next round.  You can often pick up significant market share in an economic downturn by just staying alive.
10. For more thoughts watch this video we’ve created: Save Your Startup during an Economic Downturn

Best,

YC

What “Economic Downturn” are they talking about?

Last year was full of sky-high valuations and funding rounds, and the trends have changed to the opposite in 2022 when the global investment industry is slowing down. Valuation cuts, a slowdown in funding, and a general economic downturn all around the globe are caused by exploding inflation, continuing the pandemic, as well as geopolitical tensions because of Russia’s invasion of Ukraine. For example, amid the war and sanctions on the part of the US and its European allies, the S&P 500 saw its most drastic one-day drop since May 2020, according to Time. There is no exact answer if the market is going to crash, Time writes, but the war will definitely further affect the global economy dramatically. 

• Roman Sevastyanov and Anastasia Pavlyshyna, founders of Awesomic, believe that training at Y Combinator will help their project grow faster. Since joining Y Combinator in April 2021, the company’s revenue has increased by 293%, and the number of people has grown by 333% (from 15 to 50 people), the startup says.
• Awesomic develops a platform for companies to match their design tasks with the best-fit designer. The companies pay a monthly subscription and receive task updates every business day. Awesomic shortly plans to expand its design community and product team to 100 employees; there are about 20 openings right now.
• Among the companies currently working with Awesomic are Reface, Reply, and Lift99. About 85 startups that have already used the Ukrainian team’s app are from Y Combinator.

According to the co-founder of the startup, Roman Sevastyanov, Awesomic has a long history with Y Combinator.

“Back in 2017, Anastasia and I joined the first program of an online startup school from Y Combinator (Startup School). When we founded Awesomic in 2019, our first client was also a startup from YC. We are not only inspired by the stories of their alumni, but we have long practiced the knowledge of this community in our daily work,” he said.

To recall, Awesomic raised its previous round in the summer of 2020. The company did not disclose the size of that deal, but, according to Sevastyanov, it was six figures, comparable to average pre-seed rounds in the United States.

The startup has also introduced an updated AxDraft Business product. This is a free service that helps entrepreneurs draw up the necessary legal documents, for example, a contract or an acceptance report. The service was improved and then launched on the US market – new content was added to cater to the needs of American customers in AxDraft Business, which is available only there (IP address filtering). Also, a business model appeared, earlier it was only free.

“We provide free documents for startups in the US in a Do-It-Yourself model, because we don’t see the value in the document itself. If a startup wants to get a follow-up, advice or analysis of contractor’s comments with respect to our contract, it is possible to upload them to AxDraft and we will provide analysis at a fixed price (we are still experimenting with the price) in collaboration with lawyers who use AxDraft in their work,” Yuriy Zaremba, the AxDraft founder, explained for AIN.UA.

We can get a high margin at a low fixed price for services because all participants of the process work use AxDraft.

In Ukraine, this model of monetization has not yet been launched, it is still being tested. Content for Ukraine is focused on small businesses and is completely free. Earlier, the startup attracted investments with an estimate of 1.33 million euros from Overkill. At that time, Zaremba informed that the company’s founders moved to Silicon Valley and were engaged in product development in the United States.

Oleg Rogynskyy, a founder of People.ai told the publishing that the startup will spend half of the raised funds on commercial expansion and attracting of new customers. Another half of the funds the company will invest in the development of engineering and data science areas within the business. In addition, People.ai plans to create a technical team in Canada in the nearest future. Under the terms of the deal, the general partner of Andreessen Horowitz, Peter Levin, will join the board of directors of the company.

People.ai is developing a machine-based technology that analyzes the performance of a sales department.

“We have expanded so much that now we work not with sellers only. We are now focusing on everyone who deals with customer interaction — including marketers, internal sales engineers, and sales support members.  People.ai not only captures the sales activity but gives companies a complete overview of how teams interact with customers,” Rogynskyy comments.

In May 2017, People.ai raised $7 million from Lightspeed Venture Partners and others within round A.