Leading Investors' Word of Caution for Startups

The funding slowdown has prompted marquee investors such as Sequoia, Lightspeed and Y Combinator, among others to send out warning signals

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The new normal is finally here and as we all know recession seems to be inevitable. For India's startup ecosystem, which has been having a bull run for some years, the signs of distress are already visible. The funding momentum seems to have slowed down in India and across the globe.

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As startup founders start to feel the shockwaves and resort to layoffs and cutbacks to keep their companies afloat, investors have also been advising them to stay calm and optimistic through these tough decisions. However, they have not only been asking them to prep for the uncertainty, but they are also sharing ways to ride out the downturn. Here is a gist of advice from leading investors across the globe.

Sequoia Capital

The venture capital firm sent out slides to 250 founders among its portfolio on May 16, 2022, says The Information. The firm's partners Roelof Botha, Doug Leone, Alfred Lin and Carl Eschenbach explained the founders that this will be a longer recovery than the early days of Covid, and there's no way to predict how long the slowdown might last.

"This is not a time to panic. It is a time to pause and reassess," it said, adding that the cost of capital has fundamentally increased. "Over the past two years, monetary policy loosened to avert an economic disaster in the midst of the pandemic. Negative real interest rates led to effortless fundraising for growth "companies and record valuation levels," it said.

The firm believes that the companies that move the quickest have the most runway and are most likely to avoid the death spiral.

Lightspeed Venture Partners

The firm's crucial advice is to stay optimistic. "In situations like these, the public narrative shifts negative fast and hard. Watching your stock portfolio fall by 3–5% week-over-week is paralyzing. Schadenfreude has set in for companies that raised capital at nosebleed valuations and recklessly spent it all as the market careened off a cliff," it said in a blogpost.

It also added that spposedly "founder friendly" investors, many of whom have only ever seen a bull market, are now having their first truly difficult conversations with CEOs. Fast-moving, late stage pools of capital, supposedly on a mission to "disrupt" venture capital just a few years ago, are now watching their positions shrink in value by 40–50% in less than a year, eradicating decades of compounded gains, it said.

However, the firm also added that it is optimistic despite the visible market carnage. "Progress in technology carries forward steadfastly throughout all market cycles. More business workflows will be digitized. More enterprise infrastructure will move to the cloud. More consumers and SMBs will come online globally. Web3, AR/VR, AI/automation, and more are all in early innings," it said.

Y Combinator

The firm that backs companies such as Airbnb and Reddit has said that no one can predict how bad the economy will get, but things don't look good and that 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," it was quoted as telling its portfolio founders.

Craft Ventures

The firm posted David Sacks' slides on operating during a downturn. Through this, he explains how he managed at PayPal two decades ago). The slides show how iconic companies were founded in recessions such as Google, Amazon, Salesforce, Airbnb, Stripe, PayPal and that everything gets easier, except raising $. Some advice shared include, top-up if possible, be open to lower valuations, adjust now to ensure 30+ months runway, modify hiring plans, consider hiring freeze (can still hire for key roles), trim S&M spend unless near-term, measurable ROI, aim for a burn multiple of ~2 or lower, act fast, it's the opportunity to course-correct and focus on fundamentals.

It also talks about how the companies can do it and the firm is there to help. "The world will keep spinning," it says.