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Y Combinator's Message to Founders (twitter.com/refsrc)
580 points by thesausageking on May 19, 2022 | hide | past | favorite | 250 comments



This “default alive” advice is repeatedly shared.

One thing it obviously does not address is the human element of who you cut and whether they will be “default alive” unemployed in a recession. A huge amount of YC advice in general positions founders as protagonists and employees as NPCs then are shocked people pick Google over their startup offer.

Funny thing is I’ve seen this exact advice destroy a company. In March 2020 they did deep layoffs and cited the need to be “default alive.” Then their main market surprisingly quickly grew in the rest of 2020 , they wanted to capitalize on that, but they had laid off too many engineers who knew their infra and had enough outages and slow product development that they lost to their competitors and are now way underwater on their valuation.

They decided to be serious and prudent and go “default alive” which ironically killed them. Of course if 2020 had gotten worse maybe they would look smart but the takeaway is there’s no easy answers.

I would just like to see the human impact of layoffs at least lightly considered in these conversations which it rarely is. And it’s bad for business to as Im sure many people are hesitant to join companies that will have a gut reaction of doing 70% layoffs. If you even think about doing 70% layoffs you clearly over hired and are not making good leadership decisions leading up to the layoff.


> If you even think about doing 70% layoffs you clearly over hired and are not making good leadership decisions leading up to the layoff.

100% agree with this part.

Going default alive was not the cause of whatever this company was dying. At best, it would slow or kill your growth, not your company. It sounds like it was mismanaged and prioritized something else over fixing their product. It is not bad for a company to focus on profitability.

More employees also does not mean faster product development, every developer knows this is often the complete opposite.


> More employees also does not mean faster product development, every developer knows this is often the complete opposite.

This is only true up to a point. Otherwise, every startup would be a one man show.


That's true, but the intrinsic bias of...well, pretty much everyone...is to overhire, so that's what you need to fight. I don't think I've met anyone who was suffering from under-hiring, unless it was a situation forced upon them by lack of resources.

People feel important and "arrived" when they lead a big organization, and also, it can feel like you're doing the right thing, because it alleviates some stress. Even if you're otherwise allergic to large teams, you're so busy as a founder that any help feels like good help.


> I don't think I've met anyone who was suffering from under-hiring,

I've definitely run into this a handful of times, mostly due to runway concerns and "keeping options open".


What were the clear symptoms of under-hiring?


I think I've only worked at companies that under-hired. At small start-ups it that they were worried about runway and so made everyone wear many hats and overwork / crunch on things. At large orgs its just difficult to hire and very competitive, so you always have a hard time hitting your goals even though the roles are very much needed.

I can't think of one org I've ever worked at that hit a sweet spot where you were able to hire exactly as many engineers as you needed while keeping up with growth and attrition.


> More employees also does not mean faster product development, every developer knows this is often the complete opposite.

Maybe teams are more productive when their membership is stable. Either adding or removing developers mid-project could disrupt development.


More employees means faster (or at least higher throughout) product development if and only if the organization has competent managers who know how to design an effective organizational structure, set clear priorities, hire the right people, and implement good processes. Unfortunately, competent management is rare in early-stage startups led by founders who lack management experience in larger organizations. (Yes I am aware that there are also many incompetent managers in larger organizations.)


> Funny thing is I’ve seen this exact advice destroy a company. In March 2020 they did deep layoffs and cited the need to be “default alive.” Then their main market surprisingly quickly grew in the rest of 2020

I recognize that later in your comment you say "Of course if 2020 had gotten worse maybe they would look smart" but I think it's worthwhile to compare/contrast the pure macroeconomics of early pandemic versus now. To the Fed the pandemic was an exogenous shock and they unleashed all their tools to keep the economy going. Now they are dealing with the backlash of unleashing all their tools (inflation) and are making it very clear that their priority is to bring down inflation and they are very aware that they do that by bringing down employment. So encouraging startups to go default alive is very much what the Fed wants right now. Big difference in policy direction. Exogenous shock versus endogenous course correction.


Are they just trying to reduce the amount of capital the working class has? Are there no other ways to reduce inflation right now than to curb demand? Wouldn’t a concerted effort to resolve supply issues have a similar effect?


When all you have is a hammer...

Part of the problem is that Congress is largely broken and can't adequately address issues like this. That pushes most of the responsibility onto The Fed and they have a much smaller bag of tools than Congress.


I think the technical term is "policy levers" and secondly, your dialectic there is over-simplified, reduced to talking points. Real money supply goes somewhere through some mechanisms with some costs .. not a fan of the Fed and, this is not sufficiently detailed to be representative IMHO


Its not an inaccurate summary of the fed's actions. Bringing down employment whenever wages rise certainly stops inflation, but it does so while preserving capitol holders margins. Individuals only have bargaining power when the labor market is tight.

The fed is effectively cutting off the labor side of the business cycle.


> is effectively cutting off the labor side of the business cycle

yeah - overly simplistic conclusion.. for example, you do not recognize classes of business activity at all, yet some classes of employer are affected differently or even in the opposite direction; misleading.


> overly simplistic conclusion

Dominant first order and second order effects often have simple sounding narratives. Inflation, interest rates, and growth are complex relationships. The Fed's actions on the market are however simple instruments.

The above comment points out that since the Fed started using modern monetary theory to regulate the economy. Wages and Productivity have decoupled, while one may not cause the other - it's reasonable to hypothesize a relationship based on bargaining power.


When COVID first hit, we were forced to go default alive. We didn't let anyone go but implemented a hiring freeze for 6 months and we managed to grow revenues to become cash flow positive. Default alive doesn't necessarily mean having to let go of employees.


Getting laid off is not a good feeling, but if I can rank order who I should reserve my sympathy, especially during an economic downturn, a laid off tech worker in a startup is the one I’d sympathize with the last. It has never been hard even during downturns to find work in tech. At least comparatively.


Were you around for the dot coms? I know of CS PhDs that were applying to Circuit City.


A good friend of mine and a very competent developer who is now very successful but graduated right into the tail end of the dotcom bust (circa 2002) spent his first two years out of college gluing soles in a shoe factory.


Most companies don’t need “PhDs”. They are usually less in demand than BS degrees even in good times and get paid less. Yes, I was around, had been working for four years abs had no trouble finding jobs at none tech, profitable companies.


... doesn't everyone who has a PhD in CS also have at least a bachelor (and probably also a master) in CS? Why should they get paid less? :D


At the same age, you have 4 to 8 less years of professional experience than someone with only a BS. I'm assuming the GP isn't trying to compare salary for people that are 10 years different in age.


Ah, fair, that's true!


In addition, the quality of PhD programs is highly variable.


Yeah, the bubble bursting was pretty bad for a couple years. The few companies hiring had the pick of the litter. That said, a lot of us at least had savings. Most Americans do not.


I didn’t say they didn’t have it easy, only that they’d still be quite better than many, many others in other fields (including minimum wage jobs) who’re typically worse off.


> Funny thing is I’ve seen this exact advice destroy a company. In March 2020 they did deep layoffs and cited the need to be “default alive.” Then their main market surprisingly quickly grew in the rest of 2020 , they wanted to capitalize on that, but they had laid off too many engineers who knew their infra and had enough outages and slow product development that they lost to their competitors and are now way underwater on their valuation.

It sounds like it was an unhealthy company and just didn't realize it till the tide went out. Seems doubtful that a quarter or two of fewer engineers slinging code was the root of its inability to attract & retain customers in a growing market.


The hiring market for software engineers went absolutely bonkers during COVID. Salaries shot up. Nearly everyone was hiring.

This "70%" advice was getting thrown around by every two-bit "thought leader" back at the start of COVID. I could totally see how following that advice would result in your competitors scooping up all of your former employees. And then you would be stuck in long and expensive rebuilding process just to get back to where you were, but now you would be stuck with more junior employees making higher salaries to boot. Oh and let's not forget that the 30% of the employees that you so graciously let stick around all probably dusted off their resumes, resulting at least a handful of defections. Accounting for those circumstances, I could absolutely see how a deep layoff in early 2020 would sink a company. COVID was a once in a generation opportunity for certain businesses as the entire world moved from IRL to online. Even some of the biggest tech companies struggled to keep up with the sudden demand.


Realistically engineering and product impacts just play out over a much longer period of time & the outcomes were already baked in for the next few quarters of 2020, even at a small startup. Engineering Layoffs in March aren't why they didn't catch the Covid boom in April. They were never positioned to ride that wave.


That's just bad software engineering. In general, I would expect software to scale well as far as traffic is concerned esp in today's environment where scaling infra is not really a big deal. Coping with feature requests on a shoestring staff is a different story.


Maybe it’s bad software engineering but it’s a reality that most companies have “bad engineering”, there’s always piles of tech debt and even stuff out of your control.

For example, one outage related to Google Ads API changing their parameters. This led to ads not being run which directly cost revenue since those ads were profitable. The outage went on for much longer than it needed to since people with expertise on the marketing pipelines were gone.

Id say the “bad engineering” here is mostly Google ads who should version their API changes. But if Google can’t do good engineering, I’m not counting on too many other companies to do so. This idea that infra is a “set and forget” operation because autoscaling exists is a fantasy for conference talks, not reality.


Aren't you kinda just saying "no matter how many engineers you currently have maintaining your infrastructure, your infrastructure should be just fine with fewer engineers"?


reducto-ad-absurdium: any system can be maintained by a part-timer who doesn't understand it :)


As long as you have self documenting code and tests /s


> One thing it obviously does not address is the human element of who you cut and whether they will be “default alive” unemployed in a recession.

An individual's personal financial circumstance is not a factor though. There are many people that have fixed their personal finance issue adequately. And for those who really don't have easy choice of employers or personal runway, then they're fucked. Did that really need to be said? That's what is going to happen.


It’s not a bad decision for a founder to protect the company above all, it’s their job. However, at the same time - cutting people who took a bet on you should be difficult.

When you cut 70%, it’ll make future hiring difficult, it’ll make existing employees recognize where they stand (no where). Getting laid off is one of the worst events that can happen to a person, and you really have no way of knowing what the impact on them is.

Which is to say, If a founder decided to cut exactly 70% of their staff based solely on an email from YC - I’d be very certain to dissuade anyone in my network from working with them in any capacity.


Dagnabit. Here we go again - this is a fantastic, pragmatic amendment to those notes ->

https://dalton.substack.com/p/letter-to-myself-in-late-2008?...

For a taste:

"Doing multiple small layoffs is a form of cascading failure. Do one layoff, but much much deeper than seems correct. Do it decisively. Do it so that you get profitable. In your case that is something like a 70% cut, not a 5-10% cut. Yes you read that right: a 70% cut. Cutting once and cutting hard allows you to reassure the people that are still here that you are truly profitable and won’t need to do it again. Doing a layoff and remaining unprofitable and counting on fundraising to save you is a stupid plan."


> a 70% cut...Cutting once and cutting hard allows you to reassure the people that are still here that you are truly profitable

If your employees are dumb enough that they interpret a 70% cut of the workforce as a sign that your company is stable, you're doomed. It's hard to imagine the dumbest person in the world interpreting that as a sign of stability.


As someone who has witnessed such a deep layoff and was left in the 30%, I began job hunting and moved on soon after.

When I eventually quit, senior management then explained how I was part of their grand comeback plans and offered a salary bump, and in my mind, all I could think of was how they were trying to balance a cost equation.

People far more talented than me had landed pink slips, presumably because of how "expensive" they were for their "output".

That may be the right call for longevity of the business, but I could easily be the one being disposed after my valuable output is put to use and my expense-output is reconsidered.


I was at a startup during the .com bust. I survived 3 rounds of layoffs over the space of ~18 months. I like everyone remaining at the company, could see the writing on the wall and I was spamming resume's to anyone who looked like they were hiring. Zero responses, pretty much no one was hiring except when it was an emergency. The big/profitable companies were bolting down the hatches, and everyone else was cutting to stay afloat.

I was genuinely scared when my time came, and it took another 4 months, but I consider myself lucky but am uncomfortable with the fact that a previous manager of mine at one of those large/profitable companies which had one of those fishing job postings, saw my resume and swapped me for one of his under performers (aka someone got laid off at the end of the fiscal year, and I got hired). And I took a ~40% pay cut for the privilege.

Literally the only people who were getting hired in my area where situations like that. Never assume you will get hired during a downturn unless you have a really solid network of people who will risk their own positions for you and/or work at companies that treat people like cogs to be replaced if they can get a cheaper/more effective cog.

I was at another stable but small company during the 2008 downturn, and I sadly had to turn away a lot of people I would have loved to work with again, but we were on a hard hiring freeze (the ones where upper mgmt breaths a sigh every-time someone leaves of their own volition because it gives them a bit more breathing room). So these times hurt no matter which end of the table your on.

So, don't assume the job market will remain the way it is today.


Which raises the question of when to jump ship, doesn't it? If your current employer is looking like lay offs and bad times are a head, and the market is really good, do you stay and wait or do you start looking now? You defenitley shouldn't wait to be last one to tirn of the lights, because at the very least your gonna compete with your former co-workers.


"If you must panic, panic early. Be scared when you can, not when you have to. " @nntaleb

I was an independent consultant from a 2001 dot-bomb layoff to the beginning of 2008. I saw hard times coming and took a job with the most bomb-proof client I had, and it worked out really well.


If you plan to move in the next 6-12 months, you are probably better off moving now.


I'm looking at a non zero propability of having to do that in the next 12-18 months. Not disclose too much, let's say it is funding related and has nothing to do with me.

Now my problem is that I have to move to something, and not away from something. If the company and job aren't intriguing I have a tendency to perform not as good. And I still like my employer and manager, the latter more than the former. Plus, I need to be able to show something before switching jobs.

Something to think about on the next weeks and months, especially with a family and commitments. As I said, the market is good. I wouldn't have much trouble finding something if I really wanted to. On the other hand, having a stable income after a failed attempt on a start-up is quite nice, and I'm out of the probation period.


Pretty much, if you can choose the parts of the company which are profitable and self sustaining. If given the choice, avoid profitable businesses that rely on other companies growth projections (aka ads)


>As someone who has witnessed such a deep layoff and was left in the 30%, I began job hunting and moved on soon after.

As someone who has witnessed repeated smaller rounds of layoffs, I also began job hunting after the pattern was evident. A layoff is an inherit signal that management made mistakes. Sure, there are probably better ways to handle it than others. However there is no getting over the fact that prior mismanagement now necessitates drastic measures to recover from it. That is going to be enough to get some people looking for an escape regardless of your approach.


I was in the same boat, and this is right on. The founders assumed everyone who got spared was going to be so happy they stayed with the ship until it went down. In reality, we experienced a combination of survivor's guilt for our unemployed friends, burnout at the increased workload, and anger at the founders for making choices that led to that situation. The remaining people on my team just used the reprieve to find new positions while being able to pay their bills, and we all quit, coincidentally on almost the same day.

The founders did not adequately think through the ramifications of their decisions, and it did seem (as another commenter in this thread succinctly put it) that they viewed everyone as very predictable NPCs in their narrative.


As someone who has had to execute large layoffs before — hindsight is 20/20. It’s easy to identify bad decisions after the fact. I’d have loved a crystal ball that could have told me half our customers were going to go out of business, the remainder would almost all cancel their projects, and we wouldn’t be able to close a new deal for at least the next six months. It was a really bad year, and I laid myself off at the end of it. It took me two years to get over it.


I'd just assume the company's already dead and someone's trying to suck some remaining value out of it or make a hail-mary acquisition deal to bail out their investor pals (at no return to employee stock holders, I'm sure) if that happened. I'd be working on my résumé on the "work" day when that's announced, for sure.


The CEO should be able to spreadsheet an argument at the all hands meeting to the remaining employees that they are now profitable and/or have 48 months of runway. Of course, employees are always unrestricted free agents. They can weigh this with the prevailing economic outlook and make their own decisions. Remember, YC's letter is to founders and not employees.

I believe Ben Horowitz made a similar decision and a similar pitch to his employees that he recounted in The Hard Thing About Hard Things. I don't remember Horowitz getting into the depth of the cut but I remember survivability being a stressed point.


If your talking to employees who care at all about the supposed equity they were given, then you need to be prepared to reset the employee equity pool to be meaningful.

In particular, many of the employees will have options that are obviously underwater. Any belief they had in dreams of billion dollar valuations will be gone.


> suck some remaining life out of it

It’s almost as if the blog poster would have a vested interested in seeing a massive cut.


You're too focused on the 70% used for effect. The point is to make a single cut that puts the company profitable, so there is a chance to survive. And even then it's going to be hard, but gives the company a chance.

No person should have assumed stability in a company that was not yet turning a profit. I'm not saying they are bad companies to take a gamble on, but understand they were/are a gamble. VC money suddenly drying up was part of the that gamble.


Even a 20% cut tells you that management is incompetent. If you're a CEO and you can cut 20% of your staff without destroying the business, why on earth did you hire all those extra people and add all that expense in the first place?

Put another way, if you couldn't staff right in the good times, why would remaining employees trust that your "one big cut" will work now? Hint: they won't


Cuts are done because the business has changed. Some part of the business was destroyed by external factors, and now the company needs to adjust to the new reality. It could be that VC money dries up or that customers stop spending. It doesn't mean that 20% wasn't required in the past, only that they are not required now.

This is also why a company should cut a little more than needed, so they have some cushion for things to get worse before getting better again.


I think what you're saying is true in the best run businesses, but that's not what we're seeing right now. We're seeing cuts from business that were hiring like crazy a few weeks ago.


I mean, if there is some transparency and the numbers add up, and 70% cut appears to do the trick, then it would be pretty awesome being in the 30% with a real chance to shine. I imagine there would be a big increase in stock and pay to put things in motion too. Sounds great!

Now if the plan is going to end in flames anyway, it still seems like a great reason to stick around and absorb the knowledge and experience.

I'm a fix-it person and would love the opportunity to turn a company around - it's like the ultimate challenge.


Here‘s the deal: The mere mortal „stock package“ got pretty much worthless the day the „bridge financing“ (which actually was a down-round) got announced.

Recovering from a 70% layoff only happens once in a blue moon, and usually only when a founder led company that has already reached revenue and product-market fit makes a well executed hard cut that does an exceptional job at keeping and supporting the core team amd managing emotions.

In any other more chaotic situation, the product/emotion/revenue death spiral ensuing is usually impossible to stop.


If the numbers add up to justify the layoff, then doesn't that mean that in the time leading up to the layoffs the numbers didn't even come close to adding up? I'm not sure the transparency and fiscal competence the company demonstrated to justify its layoffs would dazzle me enough to make me miss the fact that they had overhired by 3x or more.


In increase in pay? During a layoff where they're trying to save money?

And then there's the 3x increase in workload.


It's a sign that you intend the company to survive.


I took the opposite approach around 2010. I was one of the survivors of the mass layoff and I didn’t think about looking for another job.

I did build up my savings, actively engage my network “just in case” and updated my resume.

Once the final hammer hit and we got acquired for our customer list and everyone got laid off. We went to lunch, hung out in the office after our layoffs and from looking at LinkedIn, everyone had a job within a month.

At each round of layoffs, people reached out to their network and had jobs quickly.

I met a recruiter for lunch that following Monday and had an offer Thursday.

No matter how your company is doing, you should always “keep your running shoes around your neck”.


It doesn’t take much research to verify the writer’s complete lack of business acumen.


I cannot imagine a way I would interpret a 70% layoff as anything other than the CEO/management team being incompetent. I mean, if you can actually execute with 70% less, why did they hire in the first place?

The only way this might work is if a company was expanding into a completely new market and pivots away from that (ie, software startup gets a hardware division going, etc)


> I mean, if you can actually execute with 70% less, why did they hire in the first place?

Hiring and onboarding takes awhile. VC-funded companies are intended to grow quickly. Those two things put together means you need to hire for where you want to be in a year or two and not where you are right now.

The actual goals & constraints have changed.

When you hired those people your goal was scaling up as quickly as possible and your constraint was having enough people (in this scenario, money is not one of your constraints).

In the new world, the goal is "stay alive" and the gating constraint is runway.

So, no, the fact that you can survive after large staff cuts doesn't mean the CEO was incompetent. It might, but it might also just be a function of the goals/constraints/execution strategy/environment having all changed.


A very good example of how easy it is to assume incompetence when you don’t understand the constraints.


>Cutting once and cutting hard allows you to reassure the people that are still here that you are truly profitable and won’t need to do it again.

Famous last words. I'm pretty sure that companies always believe this (or at least tell their staff such), whether cutting 5%, 25% or 75%.


The thing that's interesting to me, is that this guy's company was imeem, https://en.m.wikipedia.org/wiki/Imeem, which was sold to MySpace for reportedly less than $1 million in 2009.

I know nothing about the company, but they seemed to have a decent go at it, founded in 2003. At the end of the day, though, I just can't imagine their business model succeeding, Great Recession or not.

Sure, perhaps they could have pivoted into basically something completely different, but at that point, if they were a 5-year old company, how much value would they really have been able to salvage? Given he talks about high burn rate and one of his bullet points is "Renegotiate all of your contracts with the music industry.", my guess is that their model was just fundamentally unprofitable given how much they were paying for licenses.

You'll hear lots of stories and theories about what companies could have done to save themselves, but recessions also serve a very important function of really sussing out who was selling dollars for 90 cents, and honestly that's what it sounded like his company was doing.


A 70% cut is a great way to kill your company once the remaining 30% start jumping ship. Either because of the destroyed morale or because they're doing a lot more work in a higher stress environment.


I mean, losing money is a great way to kill your company. What's better: cut 10%, lose money, people leave, cut 10% more, still losing money, more people leaving, cut 10% more, still losing money, more people leaving. Likely at 50% now with no pivot and bad morale. Compare to cut 70% + some people leave, but now you can hopefully do a major pivot and do better?


Could anyone give, say, 3 examples of that happening?


I don't know what "that" refers to, but I was at Nokia for a long time while they did 5,10,15% layoffs and it did destroy the morale, people started running for the hills as soon as they could.

AirBNB did a 25% one-off layoff and is now doing fine.

I don't know of any 70% layoffs but I tend to agree that cutting once and hard is the best approach, given what I experienced with paper-cut layoffs.


Hopper during the pandemic cut down 70% in multiple layoffs. Later that year they hit $3.5B valuation https://techcrunch.com/2021/08/17/hopper-raises-170m-on-3-5b...


Have you not been through one of these cycles before? When things get bad, there is nowhere to jump ship to, for quite some time.

Hopefully we're not heading there, but as the message says, "things don't look good".


I've been through multiple of these cycles, thank you. I don't need someone to try and explain what I've experienced.

There's almost always better opportunities for an experienced dev because there are plenty of industries better suited to weathering out a recession.



“Race, don’t chase.” Find a way to profitable — default alive — and grow from there. Don’t lie bleeding and default dead. Sounds like Dalton could’ve used this podcast at the time…

https://www.manager-tools.com/2008/10/race-don’t-chase-part-...


what if they try repeated 70% cuts?


Bleak.

"No one cannot predict how bad the economy will get, but things don't look good."

Clif notes:

- Plan for the worst ... cut costs within 30 days... get to Default Alive[0]

- Get money if you need it, and if you can

- With or without money you must survive 24 months

- VCs are people too, and subject to the same downturn. Adjust your fund raising expectations in the same direction. Expect lower valuations, lower rounds and many fewer deals.

- Disproportionate impact on international, asset heavy, low margin, hardtech, high burn, long road to revenue companies

- If you get a meeting, don't take that as a good sign, we still take a lot of meetings.

- Future fundraises will be much more difficult than they have been in the last 5 years.

- Don't expect more money until you demonstrate product market fit.

- If you planned on raising money in the next 6-12 months, we recommend changing that plan, or you may be tryng to raise at the peak of the downturn

- If you survive, and your competitor does not, you may pick up significant market share.

[0] http://www.paulgraham.com/aord.html


>- If you get a meeting, don't take that as a good sign, we still take a lot of meetings.

They don't explicitly spell this out, but this is because being a VC is still a job. Even if they're not actually making any deals, management doesn't want to see everyone sitting at a desk scrolling twitter for 8 hours, so instead they do pointless meetings.

Matt Levine had a fun Great Recession story which I cannot find right now, which is that during 2008 in the M&A department at Goldman Sachs everyone still came to work, even though obviously merger and acquisition activity was way down. They would spend every day doing calls and making pitchbooks, all of which went nowhere. Goldman didn't close a deal for a full year. A floor full of people could have just collected a salary and stayed home for 12 months and it would have had an identical outcome.


When the first deals started closing again, who would have won the deals?

The company that stayed home for 12 months? or the company that continued working for 12 months?

Imagine swimming hard against a strong current. You get nowhere (or maybe even go backwards slightly!), but when the current changes you make a lot of progress.

If you don't swim at all, you go backwards. When the current changes, you may get to where you were at the start.


That would be a dynamite answer to give during a job interview for a position in the Goldman Sachs M&A department in 2009.


I would love to read that article if you end up finding it.


The stock market is not the economy. If you are working for a money losing VC backed company and the VCs aren’t willing to keep throwing money at you, that’s because the VCs know startup funding is a Ponzi Scheme and they will be left holding the bag instead of being able to pawn their investment off onto the retail market.


The stock market is not the economy but GDP in the US printed negative the other week. If it does the same next quarter, we're in a recession.


Think of it like a bad metric thats better than other metrics


But it's a self reinforcing story. The two quarters idea is strong, if it happens all the papers will declare a recession and everyone who doesn't normally keep an eye on the economy will think it's a recession. Some of those will be managers who will decide to cut spending.


VC backed startups are a Ponzi scheme? I believe all of the FAANG companies started that way (took VC funding in their early days.) How is anybody supposed to take you seriously if you make broad categorical statements that are factually inaccurate?


Actually, my statements are very accurate.

How many tech companies that were founded since Facebook would anyone call “successful”?

Apple only took about $20K of investments and was profitable when it went public

Microsoft didn’t need any investments before it went public. Bill Gates took funding to get professional advice.

Google was profitable before going public and definitely never had billions in losses.

Facebook only went public because it had so many investors that the regulations around reporting got so onerous it was easier to go public. But it also didn’t lose billions of dollars at any point.

Amazon was the outlier, but it was also using its cash flow to expand. Most people knew that they could have been profitable at any point by not expanding. Amazon is the only one of the BigTech companies that is capital intensive.

Well Apple is to some extent. But it has always had high margins.

Even if you look at the second tier profitable tech companies like Intel, Nvidia, Oracle, VMWare, etc., you will see the same thing. None of them had billions of losses (even inflation adjusted) before going public and they were all profitable before their IPO. That means they had a proven profitable business model.


Your statements aren't even accurate in this post.

First of all there have been tons of successful private and public tech companies in the 100M+ range since Facebook which received venture funding. You can find a whole list of them just in this very website, from YC alone. Many of them profitable, not just focusing on growth and future profitablity. I also don't see a reason to limit things arbitrarily to "since Facebook".

Secondly I only fact checked your claim about Apple, but they received much more than $20k of funding. But whether or not those companies were venture funded really doesn't affect my argument. There are tons of successful companies that received venture funding. That you would double down on your claim that it's just a giant Ponzi scheme beggars belief.


Name them.


Like inflation, it's self-fulfilling. Perception is reality. Some people who strongly influence public perception - to whom we seem to have ceded our power to think critically and independently - who look for social disruption, want it.

If businesses pull in their horns, stop supporting innovation, the economic result is easy to predict.


That's why it is extremely frustrating to watch this unfold. The easiest way to kill inflation is to kill growth. But that won't help people in need anyway.

An empty shelf of baby formulas are not a sign of "economy is too hot". It is a sign of supply issue.


>> An empty shelf of baby formulas are not a sign of "economy is too hot"

The highest rate of inflation since 1981 is a sign of "economy is too hot".

The Fed has two jobs: keep both unemployment and inflation low. Unemployment is near 40 year lows, inflation is near 40 year highs.

You know what is going to happen, and the Fed has said what is going to happen, if you understand Fedspeak. They're going to raise rates, they're going to keep raising rates, they're not going to stop just because inflation slows a little, and there's a good possibility it will cause a recession.


There’s two kinds of inflation. Demand-driven inflation caused by people having too much purchasing power. And supply-driven inflation because of shortages or supply chain.

Changing interest rates does not fix supply chain problems. It actually makes them worse because it removes the financial headroom that companies involved in those supply chains have to invest in improvements.

For example, there is a shortage of computer chips. Say that you are Intel or Texas Instruments. You want to invest in producing more chips. Does increasing interest rates and probable recession make the magnitude of that investment go up or down?

The Fed is like a surgeon that has amputated the wrong leg. Not only is the patient missing a perfectly good leg, but the other leg still has gangrene.


On the other hand, if everyone runs out and tries to build giant fabs - then the price of the goods and services required to make giant fabs will rise. If the interest rates are higher, then there will be fewer fab orders - but the price per fab will be lower.


Is the Fed able to stop money supply at all? With crypto coins, the market can create its own liquidity if the Fed rises interest rates.


Worse yet, everyone over-ordered due to the supply chain issues to reduce future disruptions. We're going to end up in a recession with huge surplus of inventory.


This is what I've been predicting. Right around when the fed crushes demand, the supply chain will finally get fixed, flooding the market with supply that no one now wants.


That growth would’ve just gone predominately to the wealthy/shareholder class anyway. Better to destroy asset values and growth to destroy demand, which reduces inflation.

Baby formula is a poor example; that was Abbott having regulatory capture and a de facto monopoly [1].

[1] https://mattstoller.substack.com/p/big-bottle-the-baby-formu...


They need to kill this “growth” because they’ve essentially priced out half the population out of ever owning a home

+20% increase in home prices is not “growth”. Its sheer injustice


If it's a demand issue maybe companies fall in line and all have their layoffs at the same time, reduce worker purchasing power, and then there's fewer shortages of things. problem solved. </armchair supply chain economist>


> An empty shelf of baby formulas

Can I ask you why you've chosen this particular example? It is not about I agree with you, or I'm going to contradict in a some way, it is completely unrelated question. A complete off-topic.


The cause of this round is not some sudden bubble burst. Fed raise rates because they want to signal that they are serious about taming the inflation. That caused sharp sentiment change in capital market.

The cause of this round of inflation can be many things, we've been in low-interest environment for 10+ years with occasional QEs. It hasn't inflated the economy as much as we hoped for that 10+ years. It is lazy thinking to attribute back to QE for this round of inflation.


I believe the example was likely chosen due to the recent controversial bill in congress [0]. However, I think the choice of baby formula shows that some "core" needs in the economy are missing as well, and that the tech bubble struggling.

0: https://www.bloomberg.com/news/articles/2022-05-19/house-pas... (Picked at random from a search for "baby formula bill")


The baby formula shortage is specifically related to one company’s production being shut down, supposedly due to their negligence in maintaining quality in conjunction with policies specific to baby formula that prevent supplies from abroad to come in to fill the void.

It seems like a very poor example to refer to when talking about the broad economy’s needs and completely unrelated to a tech bubble.


Sorry, I guess I should have expounded a bit more - I think the example was chosen because of both cultural relevance [0] and because it is something that is a "core" element - I didn't necessarily mean to comment on whether it was an accurate representation of the state of things.

I would tend to agree that one "industry's" quality and policy related failings are not a sign of wider economic failure, although I think another commenter had it right with "covid hangover." There's a lingering supply/demand mismatch in seemingly all consumer markets that seems in large part due to problems that were started or brought to a head during covid.


This comment seems crazy given that we just had COVID-19, a war causing a massive energy crisis and multiple systemic commodities problems and then climate change... Also you're assuming interest rate hikes have no effect? I have no idea how you could think what's coming isn't entirely material... How can you just ignore all that?


We had COVID-19 for 2 years. The U.S. is surging back with unique challenge of spending transition from goods back to services. It is a challenge.

"A war causing a massive energy crisis" seems to be a good time to increase energy production with more investment in things like fracking, which from what I heard, people are reluctant to invest due to the economy and rates concerns (they borrow from banks too).

Interest rate hike certainly has impact, but that is the Fed to decide. Remember, Trump asked Fed to not raise rate before and JPow kowtowed to that just fine.

China's shutdown is a Black Swan. The market apparently haven't digested that yet (APPL "only" down 20% YTD).


> China's shutdown is a Black Swan.

How bad will this be?

Is China waiting to renegotiate tariffs?


> "A war causing a massive energy crisis" seems to be a good time to increase energy production with more investment in things like fracking, which from what I heard, people are reluctant to invest due to the economy and rates concerns (they borrow from banks too).

Also a bad idea for climate change, which is becoming very expensive.


Agreed. But unfortunately, nobody takes climate change (and related cost) seriously. You need a strong Federal government to enforce that cost structure (and hopefully globally, if strong enough), and the United States won't have a strong Federal government for decades to come.


We are potentially quite close to the point where small modular reactors could be commercially viable. I can easily imagine $10-20bn, carefully spent, accelerating the process.

Imagine, for example, the military placing an order for a few SMRs from each of the credible startups in the space. The reactors themselves would surely be overpriced and of dubious value, but it might substantially accelerate development and production.

In a situation where energy supplies are limited, the availability of extra (carbon-free!) electricity could help considerably.


A priori, let's quit! If people spent as much time talking about and acting on climate change as they do about how hopeless it is - a very convenient public belief for the greenhouse gas producers, even better than FUD! - we'd have fixed it. Get off your rump.


Agreed, some part of this feels like capital is flexing its muscle after a period of employees having incredible gains.


“Stop supporting innovation”

Are we talking about groceries delivery in under 15 minutes or crypto bla bla bla

Most recent VC backed starups are a big Bonze scheme that lead to poor economical output

Just look at the last spacs how poorly they performed

Hard tech is rare, and it’s not even interesting for vc

So innovation and vc startups really don’t have anything to do with each other


I feel like we talk ourselves into maybe half of the economic downturns we experience. It's probably inevitable and maybe even necessary psychologically.


Also an opportunity:

1. Good people will be more available (there will be public company cuts and private cuts, as well as resignations, especially people working for companies in the Series B to Series D range (who raised those rounds at the old multiples) who will need massive growth/patience for their options to grow into the new multiples).

2. As businesses cut costs, those are opportunities for products and services which enable efficiency.


> As businesses cut costs, those are opportunities for products and services which enable efficiency.

This is key. Innovation aside, if you can simply provide comparable services at a lower price point, the downturn just increased your customer base tenfolds: nobody is looking too much at cutting costs when things are looking up. Find niches that got too greedy over the past few years, and undercut them.


I think this sounds good when you think about a very small nieche, but if you think about global market, then in a recession as many companies go bankrupt, then there are few chances to find cheap providers so that what you offer will stay at lower cost.

I hope to be wrong about this as I would like very much to see some lower prices in some areas.


That's happening to me, I'm peddling the exact same thing at half the cost, and it's verifiable. You can just check that it's correct in a second with a laptop, after computing it for several hours on thousands of machines.

https://www.fgemm.com, coming soon.


> You can just check that it's correct in a second with a laptop, after computing it for several hours on thousands of machines.

Sounds like some blockhain thing - easy to verify, hard to compute.


Companies that have a good ideas and provide needed product/services will survive. I think the era of stupid money chasing silly ideas are over. Same thing happened at the end of the dot-com era.


> I think the era of stupid money chasing silly ideas are over

It's quite possible that this era of that is over, but I'll eat my hat if another era of stupid money chasing silly ideas doesn't spring up within a decade.


“Yeah, but this time it's different!” - Someone in 5-10 years.


Web 5.0: This time it’s personal!


Here we go again, again!


Who left the fridge open.


"The problem with the crypto revolution is how centralized it all was. That's why we've realized we should disrupt that whole industry with these new rainbow farting unicorns"


"We called it fin-tech cause it kept going under"


Lots of startups provide needed products and services. I don't think that's enough. They need to provide needed products/services in a way that can be sold/marketed profitably, and scaled profitably.


Yes. I always need 1 dollar for 95 cents.


Losing money on every transaction is no problem, they can always make it up on volume.


You joke, but a 5% ROI isn't bad YoY in the long run. Especially if it's low risk.


With 8% inflation it is essentially better to stuff your bed with some commodity than go for 5% ROI.


So in an 8% inflationary market you'd turn down a 5% ROI for a 0% ROI? How does that make sense?


Commodities usually don’t make 0% return. The price of corn, gold, and gas have all gone up significantly over time (although sometimes not faster than inflation).


Did he say a year? I want it immediately. Unlimited and no delay.


Good, unless inflation stays high


You know that's my pitch? Selling a commodity for half. Because I SUCK at selling, so that's my out, the same exact thing anybody can do in exactly the same way, that every company is on track to spend more than 10% of their revenue on, but for half.

The bottleneck of machine learning in half.

In fact you're being quite generous with your offer of 1 dollar for 95 cents, but I must decline. 50 might work much better for you, you might secretly need 1 dollar for 50 cents more than you need 1 dollar for 95 cents. But are embarrassed to ask. Provided we're talking about matrix multiplication.

And like everyone's business plan is turning matrix multiplication, better known as AI, into money, so there could be a good synergy there.

https://www.fgemm.com, coming soon.


And the idea needs to be profitable quickly. Don't try starting a business where your sales cycle take months.


I think the causation can be reversed: Companies that survive long enough have a higher chance of eventually finding the right idea and developing needed products / services.


A company that provides a needed product/service has the minimum it needs to survive. But you also need positive cash flow and you need to not have surprises and many other things. So it's easy to get caught in a bad situation and the company is forced to shut down, even though it was otherwise doing good things. Startups are particularly vulnerable, regardless of their PMF.


>I think the era of stupid money chasing silly ideas are over. Same thing happened at the end of the dot-com era.

It's called the Business Cycle. Those days are not over, they're merely hibernating


Hibernating? They've been the order of the day since 1987. Sure, there's booms and crashes, but that's why we call it a cycle.


Yeah. My parent comment was insinuating that "This time is different" which of course it won't be.


Oh. Yeah, I apparently can't read today, that's fair.


> are over

For a few years


Going to be interesting to see which free plans get cut, prices skyrocket, or what companies stop having "open core" software. Growth hacks like these have always traded revenue instead of cash for advertising/exposure, and I think it gave well-capitalized companies too much of an edge where they can effectively give things away and undercut competitors who are trying to be sustainable.

Would've also been interesting if they had separate guidance for crypto startups.


The guidance for crypto startups might be to fold and return investor money. There are a few ideas which seem "interesting" such as enterprise blockchains for bank accounting, or smart contracts for inter-bank contracts. These help large financial institutions prove to auditors that they met their contractual obligations and no funny business happened. BTC will probably stabilize as a tradeable store of value as a hedge against "unfriendly" governments.

But there is a huge sea of blockchain startups which are trading alt-coins, or providing trading analytics software/exchanges for alt-coins, or simply making coins which have vague differentiators, or whatever web3 is supposed to be. I suspect that any crypto company that doesn't have a specific use case that customers pay for will struggle for the next few years.


I am currently graduating with a CS degree and interpreting this as a warning to not accept the offer from the exciting startup and instead accept the offer from the big corporate fintech company. Is there any reason I could be wrong?


I'd be careful taking opinion about startups vs corpo from HN, bias as hell.

I've been reading about how corpos are bad for years and my experience is completely different from what people say

My personal opinion on corpos is:

_____________

pros:

working on real and complex tech products that actually make huge $$ instead of burning VCs cash on yet another food/car/room/dating app

strong execution (it definitely doesnt feel like it is moving slowly, waiting a few weeks for simple decisions)

good $$$

way stronger brand on CV

contact with people who define industry

you can change teams and do something different, you don't have to change company because huge corpos probably do "everything" (im simplifying)

___________

cons:

your impact is small, there are hundreds or thousands of people involved

your exposure to whole development process (from getting requirements, to initial architecture, development, then just support) is small because you'll probably be thrown into existing project

___________

As others suggested - at the beginning small company / startup? where you are touching everything and doing various stuff may be very helpful to learn, but it's not like corpos are bad and you should avoid them as hard as you can


This is not necessarily true. "Bigger" does not mean "more stable." Big companies like Netflix did layoffs just now; meanwhile there are plenty of small companies that are profitable and doing great. A friend of mine runs a profitable startup (~50 people). A few months ago, a candidate turned them down to join a 500+ person well-funded company that seemed more stable–that company is now bankrupt, while my friend's startup is continuing to grow.

I wrote a blog about this topic: https://www.airplane.dev/blog/evaluate-startup-offers-in-a-t...


You should definitely ask lots of questions about a startup's operations, revenue situation, funding status, etc. before you join, no matter what the economic circumstances. You should also consider whether the big company might have large layoffs soon. Which one you should choose depends very much on the specifics of the companies, as well as your financial situation, career goals, and personal temperament.


There are plenty of startups that will weather this storm, and you’re going to have a lot more actual accomplishments on your resume, and actual experience building things from a year or two at a startup.

Just be pragmatic about what companies you pick, the companies I view most skeptically during the downturns are the ones that cater to startups, like dev productivity startups, or those startup credit card companies, and given the chaos in the crypto markets, those don’t look like safe bets to me either. You can always ask about the company’s run rate, profitability, and war chest. They might not show you, but that is a sign also.


This is the time for you to take the maximum possible risks. Usually as you get older your appetite for risk decreases. Ergo, take that startup offer. You will always have a job as a programmer.


> This is the time for you to take the maximum possible risks. Usually as you get older your appetite for risk decreases.

Taking risks for the sake of increasing risk is a combination of naive and stupid. Increased risk taking must come with an increasing reward.

In an economic collapse and likely recession, having a stable job at a large established company would give you stability and, soon enough, capital for buying up home and basement prices.

Working at an unprofitable early stage startup will give you a couple high fives from the founders, but you'll be in constant fear of losing that paycheck. The reward must be substantially higher than a steady big-corp job in normal times, and even more so in today's job and economic environment.

> Ergo, take that startup offer. You will always have a job as a programmer.

Working at a startup does not magically make you a better programmer any more than working at a large company automatically turns you into a cog churning out Java beans.


> Working at a startup does not magically make you a better programmer any more than working at a large company automatically turns you into a cog churning out Java beans.

Working at a startup has a far better learning curve and better feedback about your rate of learning compared to a large company.

Buying up capital for home and basement prices is not a part of my equation at all.


I would say it's not as clear cut at that. I started out at one of the big old dinosaurs and found myself with a good amount of free time (even being on site). This meant I had a stable income and lots of time to really learn new technologies from various courses / YT content and hacking away on personal projects (while being payed on the job). I was still performing well for my main role in comparison to others at the company who you had to wonder 'what does this person even do'.


A simple question to ask: Are you willing and/or able to potentially wait 6+ months for a new job if the startup goes under? Hiring for entry level engineers is already difficult and becomes much harder when companies institute hiring freezes due to an economic downturn.

Take the safer option, weather out the recession and if you find an exciting startup you can join them with confidence that even if they fall apart you'll have the experience to find the next job much faster.


As others have said, now is the time to be risky. If you think that startup will hang around for a bit (1 - 2 years) that will be more than enough experience for you to land the next job. I'm not telling you to job hop, but it is completely normally to only stay at a position for 2 years (or less).

I personally would choose the one that would help me grow more as an engineer and IMHO, you can get pigeonholed much more easily at a big corp than at a startup.


I started in the big corporate company and now work for the exciting startup.

You want to maximise your learning, as long as there isn't a massive salary discrepancy try to have a lengthy chat with your future tech lead and pick the one that seems better - ultimately this is the person you'll be learning from the most in the next few years.

And also, don't be scared to quit or change teams early. Don't stay longer than you have to.


> I am currently graduating with a CS degree and interpreting this as a warning to not accept the offer from the exciting startup and instead accept the offer from the big corporate fintech company.

You will be the first to be laid off. When everyone is competing to keep their jobs, you will have no influence. Also, fintech can be cutting edge, which is not what people spend on during downturns.


If you have the choice between "exciting startup" and "big corporate fintech company" then you don't have worry and economic down turns at all.

The reality is that in a turn down turn you aren't choosing among great options. In 1999 software engineers making 100k+ in 1999 (this was a lot more money back then) working for a cool startup ended up working in banks making boiler plate code for ~80k. Most of them were forced out of the industry.

If you're in a position to be making choices like you describe than there is no meaningful down turn in your industry.

A more likely outcome in the event of a serious is that in 5 years you aren't doing CS related work. Talk to people that have worked in aerospace during various periods of down turn (or any similar industry).


Choosing between a startup vs a big corporate is a separate topic. There are advantages and disadvantages to each. In essence you trade learning for stability. It really depends on what you are looking for and type of environment you want to be in. If you have done the calculus and are more interested in a startup I would recommend asking what the run rate of the company is and do they have any plans to hit profitability.


If you discount your stock options to be worth 0 (which is the most likely scenario) and it still makes sense to work at the Startup then go for it but save aggressively because while they may tell you there won't be layoffs and they are in a strong financial position when layoffs do come they are almost always last in first out.


Take the safe job when you are old and have family/dependents. Take the long shot bets when you are young. You have the potential to learn way more way more quickly at a startup and if it folds you are still young and have experience. I wish I would have taken this advice when I was 25...


I was young and poor, if you're young and poor don't take the long shot bets. You need to build stability. Long shot bets will burn you out if you don't have a safety net (and living with your parents is a completely reasonable safety net, just unfortunately one I didn't have!). I wasted my 20s thinking if I worked 60+ hours a week for a startup I would be one of the lucky ones, and it was foolish.

As usual, there's no one-size fits all advice.


But if you are working in a startup you will hardly be poor esp with a comp sci degree.


I'm not talking about SV startups really, more like every rich dipshit in a podunk town that wants to abuse someone for some "big" idea (or advertising companies). I guess times have changed a bit though, and just about any developer can more easily get big paychecks from reputable companies these days.


But don't spend all your money! You have very few obligations when you are young. Basically feed yourself and pay rent. Save the rest. You will thank yourself when you are 50, because you can't catch up if you wait until then.


I’m by definition “old” at 48. But my “safety” comes from always being employable. Since 2008 and I was already 34 (I stayed at my previous job before then for 9 years), I’ve had six that ranged from startups to big enterprises to my latest BigTech company that has a reputation for PIPs.

I never worried about whether I wouldn’t be able to find a job.


Take the job where you will learn the most. If that's a startup and it dies no one will hold it against you. If you're good you'll probably be able to find something even in a lousy economy.


The corporate job might be less risky than the startup, but neither one is a guarantee.

Either way, you need to ask yourself if 6 months out you get laid off and there is no one hiring, what's your plan?


This issue impacts any high growth companies. It's pretty much all of tech both public and private. You can't avoid it unless you go work outside of tech


It depends. You just need to do more due diligence and ask harder questions to that exciting startup, especially around burn rate, and profitability goals.


It depends on your appetite for risk. But fintech means you’ll have a job in 2 years (likely). Nothing is guaranteed.


Finance means that, probably. Fintech isn't the same ballgame.

Work for a startup and you'll have an embarrassment of riches for learning opportunities. Work in finance and you'll likely need to take some initiative, and earn and deploy some political capital, to make your own.

Right now, though, it's time to be looking for a safe port above all else. If you're young and good, you won't have trouble ending up with a compelling story to tell about your time with BigCo. In the meantime you want to think about how much worrying you'd like to do about where your next check's coming from.


Find a strong engineering team and learn.


Layperson here, I didn't know we were in an economic crisis that bad, is it global? What are the reasons?


There's a trend of global economic inflation, caused by supply issues in energy (oil, gas in all forms) related to the war in Ukraine, supply issues more broadly related to a hangover from COVID's supply/demand shocks.

Interest rates are rising, to appease inflation.

As the interest rate goes up, allocators of capital have less appetite for risky allocations. This makes access to capital for VC firms becomes more competitive. This makes access to capital for "startups" becomes more competitive.

There's also a bigger macrotrend, which is another hangover from COVID: investment poured into the tech sector, which was booming during COVID. Investors over-bullishly priced-in the idea that this boom was, in fact, a new baseline or indicative of future exponential growth. As we recover from COVID, these pricings are increasingly revealed to be wrong as companies generally report post-COVID numbers that are closer to pre-COVID numbers.

This is bad for investors leveraged on tech. Therefore, it's bad for VCs that raised LP capital on the basis of COVID performance. Therefore, it's bad for companies that raised >20x ARR multiples on the basis of COVID performance.

Basically, it's a single or double whammy for most of the economy, but a double or triple whammy for unprofitable startups.


Energy prices being high are only a small part of it. Unfettered stimulus, even when we didn’t need it (eg rent payment moratoriums and stimmy checks while at full employment), is what’s driving it.


The largest portion of "unfettered stimulus" went to private companies in PPP loans... but that's rarely brought up, which I always find interesting.


Every once in awhile I look up PPP loans of companies I know didn’t suffer any Covid-relates downturn (some even thrived) and am never surprised to see fat checks fully forgiven.

Must be the greatest theft in US history.


> Must be the greatest theft in US history.

In nominal terms it was.


The way I phrased it made it sound like energy prices were the only component, my bad.

Yes, stimulus is a contributing factor. But I don’t think it’s the primary contributing factor, it depends on the sector.

The price of oil affects the price of food, heavy things, etc much more than stimulus checks. I’m not saying stimulus has no impact on prices, but I think it’s erroneous to say it’s the “driving force” of 8% YOY inflation — maybe it’s the driving force of 2 or 3% of that? The price of gasoline is very underrated as an influence on prices generally: the cost of transport is the backbone of our globalized economy.

On the flip side, partially thanks to direct stimulus checks, child credits, etc, median household savings are at an inflation-adjusted high watermark, and the debt:income ratios are also in a decent spot so the median American is better prepared for this recession than previous ones.


Then why is inflation so high globally, not just in the US?


That got us an instant recovery, which is much better than 2008 when we went too small and everyone under 40 lost their chance to own a house.


Zero Interest Rate Policy.

Encourages resource mis-allocation, which means there is less stuff we actually need to go around.

We should have used fiscal policy more aggressively to fix the Great Recession, but that would entail taking money from rich people and giving it to poor people, and we can't have that can we?


Inflation and interest rates are rising (for lots of reasons), which means money is getting much more expensive. This means that high-growth companies and unprofitable companies are going to get burned hard in the near future, because their very existence relies on access to cheap money.

The wider economy isn't terrible. Inflation is rising and GDP is pulling back a little bit, but unemployment is low, and wages are mostly flat.

But the NASDAQ (comprised of mostly tech stocks) is down 26%+ year-to-date and falling. People on this forum mostly work in software, and this downturn will almost certainly shift the balance of power from unprofitable high-growth companies (especially crypto, Web3, etc.) to companies that actually make real money.


The stock market is down and inflation is up, but are we really in an economic crisis just yet, or just predicting one in the future ?


I wouldn't take this to be a guarantee that we're moving into a recession, but the VC market is drying up quickly, and this is an appropriate level of concern for YC to have for its companies.


Interesting. Local news says today US tech is in pain.


> No one cannot predict how bad the economy will get

Make an effort YC.


Works on contingency? No[,] one cannot predict how bad the economy will get.


Aha, yeah. Hadn't thought of that. Amazing the difference a comma makes.


Beautiful Simpsons reference, thank you.


Predicting how bad it will get is possible, it's just apocalyptic thinking, which is frowned upon and dangerous. Like the whole paranoia bullshit thing about how paranoid people are inferior, or something I can't listen to such bullshit. Ties in nicely to making everyone buy and hold, value investors.

Well earlier this week I myself made a prediction this week there would two days were the market would fall, one down -2.9%, the other down -2.2%[1]. I told this to a friend who speculates. Telling him we should talk that day, Sunday, instead of later in the week, because after those shitstorm days he would have no fucking time. Just booked solid, bailing out shit from those storms.

I was wrong, there was one day down -4%, another down I think down -1%. So I was wrong. No one can predict how bad a market will get. At the same time, my speculator friend hasn't written back.

[1] Yeah I realize down -2.2% might be interpreted as a double negative. In other languages like French and Spanish, and African languages, negatives are emphasis. It's an English thing to say even number of negations is positive. Basically so the words in people's denials could be deformed into admissions. Making their defection defective. Obviously the way to express a market rise is "the stock market went up +2%." Note also the + symbol, very rarely seen.


Fun to read the typo literally—it does often seem true that no one can resist predicting


Maybe it's a "don't think about a pink elephant" kind of thing? Once one considers the possibility that one might predict how bad the economy will get, one naturally thinks up such a prediction?


Yeah no kidding, wow.


"No one cannot predict how bad the economy will get..."

???

I get that it's twitter, but grammar is still a thing.


I'm betting the sentence started as "We cannot predict..." and someone decided that phrasing sounds a bit too much like YC specifically is bad at predictions (instead of the intended collective 'we'), so they switched it to "No one", forgetting to swap out 'cannot' for 'can' in the process.

Interestingly, I've been learning Indonesian and they actually have a solution for this ambiguity: two words for 'we'. There is 'kita', which is a 'we' that includes the listener (or reader in this case) and 'kami' which excludes them. So in this case YC could've used 'kita' to mean "we (including you the reader) cannot predict...".


You bring up a good example with regards to ‘clusivity’ in Indonesian; quite a few Indian languages have such constructs too[0].

[0]: https://youtu.be/YqbT-YuIwCg


To be honest 'I could care less'


I still get a couple dozen emails/week from recruiters in addition to phone calls, linkedIn connection requests,etc. - it seems like it's still close to the peak number. However, I suspect that's about to stop abruptly.


employment is a lagging indicator.


Can anyone post a copy with intact links?


"Default Alive" - http://www.paulgraham.com/aord.html

"pre-product market fit" - links to a list of resources: - The only thing that matters by Marc Andreessen https://pmarchive.com/guide_to_startups_part4.html - What is “product/market fit” by Emmett Shear: https://twitter.com/eshear/status/1155180521485242368?lang=e... - Andy Rachleff on “How to Know If You’ve Got Product Market Fit” https://greatness.floodgate.com/episodes/andy-rachleff-on-ho... - How Superhuman Built an Engine to Find Product/Market Fit by Rahul Vohra https://firstround.com/review/how-superhuman-built-an-engine... - The real product market fit by Michael Seibel https://www.ycombinator.com/library/5z-the-real-product-mark... - Jeff Chang's blog - specifically his take on retention as measure of PMF https://www.growthengblog.com/ - Sequoia's Doug Leone discusses PMF https://streamable.com/rm7pr7 - Dalton Caldwell & Michael Seibel discuss PMF https://youtu.be/UqKzpLqXuI0

"Series A Milestones" - links to a private resource available only to YC founders

"Save your startup during an economic downturn" - https://www.youtube.com/watch?v=0OVSTWozvfY


Thanks for sharing. Would be cool if you could share some of the Series A Milestones.


can somebody share the Series A Milestones resources?


Is the internal Series A Milestones different than the Series A Guide: https://www.ycombinator.com/library/14-series-a-guide


THANK YOU!



What are the Series A Milestones linked in the email?



Honestly I would just go work for FB/Google/MS/Apple and maybe Amazon. I'll only consider a startup if I can grow with the company and corresponding opportunities don't exist in the big ones. If the YC theory is basically that employees are a toxic asset, they are bound to get people who turn out that way since the more performant and responsible folk will opt for bigger and more stable companies.

Edit: I don't really think all YC backed companies think that low of employees.


FB and MS are freezing hiring. Apple slowing.


I don't remember that they said something like this during COVID, Did they say something like that in 2008, or is that an unprecedented statement? I mean they exist since 2005, what did they say during the "Great Recession" ? (i think they called it like that, at some point...)

I mean, i mean: is this one going to be worse than 2008?

Fortune magazine is trying to compare our current problems with 2008. They say that it might turn out to be worse, this time, as 2008 was merely a "black swan event", the difference being that inflation is coming "for real" right now. https://fortune.com/2022/03/26/great-recession-key-differenc... Also this:

    "By some standards, stocks are now even more overvalued than they were back then, leading some experts to argue we’re experiencing an “everything bubble.”

    Dan Ives told Fortune. “Tech valuations relative to growth, in particular, are much cheaper today, by about 25%, than they were going back to ‘07.”

    Ives argued that the financial stability of tech stalwarts, which by some estimates represent over 20% of the S&P 500, is unparalleled, noting that the Great recession was mainly a “black swan driven event.” "
So they might have to come up with a new name, if this one turns out to be worse. Maybe they should go for the "Even Greater Recession", abbreviated as EGR...

Also the economists don't appear to have predicted it. Well, at least US Intel was right about the war in Ukraine...


I believe YCombinator was still very small in 2008. Otherwise, they would probably have said something similar.


Translation: as has been the case since the dawn of capitalism, companies going forward will have to turn a real, liquid profit from selling an actual good or service. Gone are the (highly anomalous) days of starting a purposefully unprofitable company whose only path towards “profitability” is a) getting acquired or b) endless rounds of VC funding.


>> starting a purposefully unprofitable company whose only path towards “profitability” is a) getting acquired or b) endless rounds of VC funding.

and worst of all, c)pursuing a predatory pricing strategy to monopolize the market and crowd out competitors.


Yup. I think that fits under b), since it’s only possible to run out the clock on competitors with a predatory pricing strategy with endless rounds of VC funding.


Is it possible to raise a series A before reaching product market fit ? I thought it's more like you raise a Series A to scale up ? Why would someone give you 20M dollars to just do research ? Never did this myself btw do maybe all these questions are tosh.


In the fundraising environment of the past few years, well-connected companies could raise a series A before even having a commercial product. (https://techcrunch.com/2019/12/17/anyscale-ray-project-distr... is the example I remember most clearly)


This is actually traditional venture for real technology. The only companies with customer before the series A are variations of websites and apps, a narrow slice of the tech sector.


Interesting. I guess that makes a lot of sense now that you say it, it's gonna be hard to build anything physical without spending a lot first.


https://nitter.kavin.rocks/refsrc/status/1527238287471292417

OCR'd text:

4:11

Greetings YC Founders,

During this week we've done office hours with a large number of YC companies. They reached out to ask whether they should change their plans around spending, runway, hiring, and funding rounds based on the current state of public markets. What we've told them is that economic downturns often become huge opportunities for the founders who quickly change their mindset, plan ahead, and make sure their company survives. Here are some thoughts to consider when making your plans:

1. No one cannot predict how bad the economy will get, but things don't look good.

2. 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.[1]

3. If you don't have the runway to reach default alive and your existing investors or new investors are willing to give you more money right now (even on the same terms as your last round) you should strongly consider taking it.

4. Regardless of your ability to fundraise, it's your responsibility to ensure your company will survive if you cannot raise money for the next 24 months.

5. Understand that the poor public market performance of tech companies significantly impacts VC investing. VCs will have a much harder time raising money and their LPs will expect more investment discipline. As a result, during economic downturns even the top tier VC funds with a lot of money slow down their deployment of capital (lesser funds often stop investing or die). This causes less competition between funds for deals which results in lower valuations, lower round sizes, and many fewer deals completed. In these situations, investors also reserve more capital to backstop their best performing companies, which further reduces the number of new financings.

This slow down will have a disproportionate impact on international companies, asset heavy companies, low margin companies, hardtech, and other companies with high burn long time to revenue.

Note that the numbers of meetings investors take don't decrease in proportion to the reduction in total investment. It's easy to be fooled into thinking a fund is actively investing when it is not.

6. 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.

7. If you are post Series A and pre-product market fit,[2] don't expect another round to happen at all until you have obviously hit product market fit. The Series A Milestones[3] we publish here might even turn out to be a bit too low.

8. 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.

9. 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.

10. For more thoughts watch this video we've created: Save Your Startup during an Economic Downturn.[4]

Best,

YC

________________________________

Notes:

Presumed links (I do not have a copy of the original message). See also https://news.ycombinator.com/item?id=31436244

1. Default Alive: http://www.paulgraham.com/aord.html

2. Pre-product market fit: See: https://www.ycombinator.com/blog/ycs-essential-startup-advic... "do things that don’t scale: remain small/nimble"

3. Series A Milestones: Presumably private.

4. Save Your Startup during an Economic Downturn: https://yewtu.be/watch?v=0OVSTWozvfY?vq=hd720


> This slow down will have a disproportionate impact on international companies, asset heavy companies, low margin companies, hardtech, and other companies with high burn long time to revenue.

Wonder how things will shake out for biotech. I know biotech investors have long timeline, but surely they are feeling pressure too ("LPs will expect more investment discipline")


Much of that depends on how long and deep the recession goes on, and the extent to which investors are forced to sell even high-quality assets to meet cash obligations.

Bad investments driving down good is one of the perverse dynamics of panics that J.K. Galbraith notes in The Great Crash: 1929:

The great investment trust boom had ended in a unique manifestation of Gresham's Law in which the bad stocks were driving out the good.

(Chapter VI)


> I know biotech investors have long timeline, but surely they are

Inherently long timelines has pluses and minuses, but can make you very sensitive to timing.

Raising a bunch of money to go through a long dev cycle just before a downturn/recession can be a pretty comfortable place to be. Coming out of that development into the face of one - brutal.


This is a reasonable YC link for Series A milestones: [3] Series A Milestones: https://www.ycombinator.com/library/1k-benchmarks


Thanks!


Our VC firm just did a response to this... https://www.linkedin.com/pulse/shot-ventures-responds-econom...


Could someone post the date of the email? I assume it's around the same time as the tweet?


That double negative hurt my head.


There were so many unicorns that were pulled forward to go public that I don’t even think there’s this gigantic fluff remaining (a la dotcom). They already busted and it doesn’t even feel like we crashed.


>Posting a picture of words on twitter

Wouldn't a blog serve the message better?


It wasnt to us, it was to the people in the club


RIP Sequoia Times

The king is dead

Long live YC


Hard to believe there isn't a storm coming at this point.


Perception is reality.


It will be harder for startups than other companies.

The 'storm' will be focused heavily on capital and so all that liquidity will tighten up.

Big waves up, big waves down.

Healthcare won't miss a beat.


Would you add more detail as to your comment on healthcare? Are you saying that this downturn will not affect healthcare investments? Curious as I am a digital health founder looking to raise our pre-seed soon


Startups depend on free flowing capital, i.e. excess liquidity, and so we tend to do more big moonshots during times of easy money, and there are lower rates of return elsewhere. When capital is tight, funds want to more direct ROI, and are less willing to shell out dollars for 'long term opportunities'. So companies doing '10 minute delivery' and need 10 years of 'losing money' to be profitable are in trouble.

Healthcare is an economy that tends to be much more recession proof, for a variety of reasons.

First is obviously less elastic demand - if your arm is broken, well, you need to fix it.

Second, is that it's really institutional and operational. Healthcare is not a highly leveraged industry, like Crypto - they're not subject so much to the whims of the market. Healthcare is not quite as 'capitalist' as other industries either, obviously in some ways it is, but there's an underlying kind of goodwill.

Third, is that 1/2 the industry is government spending, which doesn't get hit bad like markets, so there's a smoothing effect.

Fourth, is that investment cycles are much longer, to the point where they almost rise above most of the short term 5-10 year macro cycles.

Beyond that, there are indications that people 'get sick more' in downturns and there may be an increase in demand in some ways.

Healthcare tends to be a bit recession proof for those reasons. You may want to Google up on that a bit.


Well, I wouldn't say it's coming.


I was at Palintir, and one of the things I learned from visiting is that they thrive in times of war, pandemics and recessions. Why aren't companies designed to be antifragile like this


...?

Companies, by definition, can only be thriving when people are spending money with them. By definition, a bad economy means people aren't spending much money.

Specific sectors may do well during recessions. I knew of a business that used to publish bankruptcy notices for attorneys. A recession meant doubling their sales. But it's necessarily impossible that every business can be "anti-fragile".


Defense companies profit from war, more at 11.




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