In an unexpected move, Y Combinator, the historic mothership of the startup economy, will downsize its next wave of startup funding to 250 companies, down from more than 400. This is one event in an avalanche of recent news about startups downsizing or VC funds going bust (Softbank Vision Fund just reported a $23 billion quarterly loss today).
What should be read into this? Is this just getting in back-to-normal mode after a few years of crazy fuelled by dirt-cheap capital and rampant FOMO? Or is it the first shoe falling, signaling the end of the world for incubators and the startup ecosystem as a whole?
My answer is yes.
Three months ago, Y Combinator was already warning its founders in non-ambiguous terms:
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.
This is about the time when the notion of unit economics suddenly came back in all pitch decks.
So yes, reverting to a rational mode of thinking where startups would remember they are businesses would indisputably hurt the most capitalistic moonshot projects. What if Uber wouldn't have been able to burn $25.2 billion over 13 years to barely turn a profit last quarter? Would that have been so bad?
To quote Paul Graham, the founder of Y Combinator, back in 2015 when it was still, in my opinion, a proper incubator (as opposed to a speculative hype machine):
When I talk to a startup that's been operating for more than 8 or 9 months, the first thing I want to know is almost always the same. Assuming their expenses remain constant and their revenue growth is what it has been over the last several months, do they make it to profitability on the money they have left? Or to put it more dramatically, by default do they live or die? (...) Maybe it will help to separate facts from hopes. Instead of thinking of the future with vague optimism, explicitly separate the components. Say "We're default dead, but we're counting on investors to save us." Maybe as you say that, it will set off the same alarms in your head that it does in mine. And if you set off the alarms sufficiently early, you may be able to avoid the fatal pinch. (...) In any case, growing fast versus operating cheaply is far from the sharp dichotomy many founders assume it to be. In practice there is surprisingly little connection between how much a startup spends and how fast it grows. When a startup grows fast, it's usually because the product hits a nerve, in the sense of hitting some big need straight on. When a startup spends a lot, it's usually because the product is expensive to develop or sell, or simply because they're wasteful.
As far as I'm concerned, I look forward to doing what I do best with startups: pushing on the potential customers' ROI and how it translates into pricing the alleged innovation. It's always been about MVP-ing businesses, not products.
