One of Silicon Valley’s most renowned startup accelerators, Y Combinator, has told founders of its portfolio companies to “plan for the worst,” warning they face a rough ride ahead as the economy declines and funding becomes more difficult to obtain.

“No one can predict how bad the economy will get, but things don’t look good,” Y Combinator wrote in a letter to portfolio founders that was first published by TechCrunch. “The safe move is to plan for the worst.”

Y Combinator, which has backed multiple successful tech startups in their early days, including Dropbox Inc., Coinbase Global Inc., Airbnb Inc. and Reddit Inc., suggested to startup founders that they begin cutting back on expenses and “extending their runways” within the next 30 days. As for those startups that don’t have the runway to “reach default alive,” it advises seeking to raise money as soon as possible.

The warning to startups comes a week after one of the biggest venture capitalists in the technology business, SoftBank Group Corp., announced it would start being “more selective” in its investments. That followed a loss of $27.7 billion from investments made by its Vision Fund in the just-ended fiscal year.

Other venture capitalists such as Tiger Global and D1 Capital have also reportedly started pulling back on late-stage investments. In April, Crunchbase reported softness in the venture market, noting it had declined on a quarterly basis for the first time in over a year.

Meanwhile, public tech stocks are in crisis too, with companies such as Netflix Inc. and Meta Platforms Inc. suffering big drops in value since the turn of the year. Such conditions make it more difficult for VC firms to raise cash from liquidity providers. Other growth firms may choose to deploy their cash in the public market instead of betting on startups.

Fears over the economy stem from steadily rising inflation and interest rates, plus geopolitical unease due to issues such as the war in Ukraine and China’s ongoing battle against COVID-19.

The warning from Y Combinator will no doubt resound among startup founders. It’s one of the biggest startup investors of all, typically investing in hundreds of small firms. The letter suggests a bleak future lies ahead. “It’s your responsibility to ensure your company will survive if you cannot raise money for the next 24 months,” it said.

Y Combinator added that founders who were planning to raise cash within the next six to 12 months risk trying to do so at the “peak of the downturn,” when it would be much harder.

Charles King of Pund-IT Inc. told SiliconANGLE that Y Combinator’s reasoning behind today’s warning is that it’s better to be safe than sorry, what with increasing talk in the U.S. about the possibility of the economy going into recession. That talk is being amplified considerably by continued disruption to the economy by new COVID-19 variants occurring globally, he said.

“Spending prudently is never bad advice, even for startups, and seldom hinders innovation,” King said. “Plus, entrepreneurs and executives who have never suffered a significant economic downturn should be reminded that if or when things really do go off a cliff, preserving their businesses and teams will not be a priority for venture capitalists who will likely be dealing with their own problems and disasters.”

Constellation Research Inc.’s Holger Mueller said Y Combinator’s warning indicates that both investors and startups alike are having to adjust their spending plans amid a contracting economy that’s likely to get worse before it recovers.

“With many software startups working virtually due to COVID, the only place where they can achieve substantial savings is on personnel costs,” Mueller said. “In line with typical downturn cost-cutting patterns, that means we can expect to see marketing spend at many startups slow down, with salespeople being laid off, services being given to partners and also reductions in R&D spend. It may not be all bad news though, because if startup founders are forced to make smarter decisions around their spending, that will leave them well set to come out of the recession in stronger shape.”

Y Combinator added a final word of caution for those founders who, despite all the warning signs, may feel that it’s being overly dramatic: “If for whatever reason you don’t think this message applies to your company or you are going to need someone to tell you this in person to believe it, please reassess your beliefs on a monthly basis to make sure you don’t drive your company off a cliff,” it stated.

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