PART 1: As Y Combinator issues cautionary advisory, we hear from a local investor
If you are a regular reader of teknovation.biz, you know that our default is to positive stories that share the aspirations of entrepreneurs and focus on programs and innovations that will accelerate their growth. We traditionally shy away from negative articles, but recent economic news suggests caution based on geopolitical and economic winds that are blowing.
The most recent item was an advisory issued last week by Y Combinator, the Silicon Valley-based start-up accelerator that has backed more than 3,000 new ventures around the world. As reported in numerous media outlets like this article from TechCrunch, Y Combinator advised its portfolio companies “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.”
You can read the full advisory in the TechCrunch article.
We contacted several firms that invest in this region and asked them what they are advising their portfolio companies. Today, we publish the thoughts of Eric Dobson, Managing Partner at Sheltowee Angel Network.
“Stay the course,” Dobson wrote. “The big market is largely decoupled from the private equity/early stage equity market. Inflation is a natural outcome of the massive stimulus of the last three years. There was no way to avoid it without spooking the big market, and it will take some time to pass. Political turmoil will continue to occupy the minds of investors and entrepreneurs. The Pandemic is not done with us, but we are learning to live with it. The good news is, in times of economic turmoil, alternative investments often increase. What should you expect over the next 12 months? The average investment size will likely drop during this turmoil, but great entrepreneurs with great ventures will continue to get funded. It has been a seller’s market for the last year, which was an unexpected outcome of the pandemic. Corrections happen when markets overheat; that is what they do. So, if you want to stand out, do your homework and ensure you communicate with your investors, present and future, openly and in a transparent fashion. Create the right plans that prove you can run and scale a business. Valuations will likely take a hit, but they were getting absurd. Be reasonable about your true value. We are looking for a fair value for your company, which does not change due to turmoil . . . it’s about your planning, traction, market size, business model, and execution. If you overvalue your company, you risk a down-round, which can be a devastating signal to the market. My guess is this will be an issue for a number of companies that were invested in the last 12 months. If your company is one, make sure your money will last until you can justify your valuation before seeking new capital. That is how the system works; checks and balances.”
Tomorrow, we share the thoughts of Derren Burrell, Founder and Chief Executive Officer of Veteran Ventures Capital.