For the past period, I noticed the impact of “YC email to founders” on many of the local entrepreneurs I mentor. A copy of that email has been circulating on social media, inciting major concerns with many of the founders, especially those who are about to initiate fund raining campaigns. Yes, the availability of VC funding should be a concern in the coming period. According to the latest CB Insights report on the matter, global funding is expected to make a 19% decline (QoQ) in Q2, 2022. I expect this global decline in funding trend to stay for a while. However, I also expect that Africa and the MENA region will continue to show a rising interest from VC and angel investor money in 2022/2023.
The YC email urges founders to prepare for the worst, cut costs and be ready for what is to come.
“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.”
The email also urges founders to seek Default Alive as their number one goal.
If you are not familiar with the term Default Alive is “a startup company that is on track to make it to profitability with its current resources. In other words, ki revenues will cover expenses before cash runs out.”
I believe that this email marks the beginning of a transformation in the mindset behind how founders will build their startups in the future. The recommendation to go for Default Alive marks a significant shift in the founders’ focus: from investor to customer money. Founders will no longer, under the circumstances, be dependent on investor money to build their companies. They will have to create real tangible value for customers and not just “acquire” the customers with nonsustainable cash-burning hacks to attain higher valuations.
Focussing too much on investor money urged entrepreneurs to create investor-pleasing products and results and not customer-pleasing value propositions encapsulated in sustainable business models.
I understand the glamour that comes with investor money. In the startup world, investor money is equivalent to prestige and acceptance. It also means, in most cases, a significant hike in the startup valuation as well as the founder shares value. It can also help them acquire a better caliber of team members and high-profile board members and perhaps score some prestigious partnerships.
From my experience with local founders, many realize late in the game that these are only short-term benefits. They quickly realize that without securing a reliable stream of customer money, they are vulnerable. Until they know how to reach profitability the startup remains a sponsored project in danger of losing the support of the sponsors at any point in time. Therefore, fundraising dominates the founders' focus, and seeking the right “numbers' to please investors quickly entraps all major decisions making and alienates customers' best interests. This entrepreneurial energy-draining activity continues until, eventually, the money runs out or, by some miracle, founders achieve an IPO. And yes, going for a successful IPO with a yet-to-be profitable business model is indeed a modern miracle of business.
The current circumstances represent a blessing in disguise. For the first time, our founders are in a situation where they are motivated to seek customer money. In other words, startups are geared to create value for the customer beyond the urge to pump up valuations. Customer money motivates founders to build long-term relationships with customers and not just acquire them for a couple of transactions to make the numbers look good. Customer money helps focus on the value offered and not reasons to speculate on valuations. And finally, seeking customer money with limited resources is the ultimate motivator for innovation and the creation of new frontiers to conquer.
Goodwill and Respect