Venture capitalists including Sequoia and Y Combinator are warning that an economic downturn is to threaten future fundraising, meaning start-ups should look to raise cash right now or conserve it.
The pair are responding to rising inflation, ever-climbing interest rates, the continued conflict in Ukraine, the pandemic and other geopolitical tensions.
Sequoia held a Zoom conference with its founders and the presentation, seen by The Information, talked about avoiding a commercial death spiral in any coming downturn with fledgling businesses urged to start thinking about trimming costs and pulling in spending.
Y Combinator, which backs hundreds of small businesses, sent out a letter to start-ups in its portfoilio entitled “Economic Downturn” – reported by TechCrunch – saying they should focus on reaching a so-called Default Alive status. That means a startup business can reach profitability with its current funding. The opposite, Default Dead, is when a startup runs out of cash before profits arrive.
The letter urges start-ups to “plan for the worst” following a tumultuous time for tech stocks, with declines reported in the past seven weeks. It states:
- No one can predict how bad the economy will get, but things don’t look good.
- 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.
- 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.
The YC letter finishes by saying: “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.”
Our thinking is that storage startups that could be feeling the heat include ones whose last round was in 2019/2020 and who are still burning cash.
Multiple technology vendors have filed financial results in recent weeks that highlight the challenges they are currently facing in the industry. Cisco, Nutanix, Arista, NetApp, Dell and more said underlying demand was strong but meeting demand in a troubled global supply chain is no easy task. Yet the apparent direction of travel in the stock markets is clearly causing investors some concern.