Welcome to another Monday.
In what seems to be a season of letters or emails – Y Combinator (YC) a popular Silicon Valley venture capital firm, also took time out last week to advise its portfolio companies.
This firm, which was an early investor in companies such as Airbnb, Dropbox, Stripe and Flutter wave; is advising these companies to prepare for a possible economic downturn. According to the letter, “the current situation can be as bad as the last two economic downturns”.
The letter, though addressed to companies is also applicable to individuals in my opinion.
Find below some excerpts of the letter:
- Economic downturns often become huge opportunities for founders (individuals) who quickly change their mindset, plan ahead and make sure their company (finances) survive.
For individuals, this will mean planning our budgets smarter, eliminating loopholes and being prepared to take advantage of opportunities as appear. It is key to note that one has to be more circumspect in taking these opportunities.
- YC also advised founders to factor in their planning, the fact that no one can predict how bad the downturn will be. According to them, “the safe move is to plan for the worst”.
This also holds true for individuals and households. This is the best time to cut down on expenses and conserve as much cash as possible.
- Founders were also warned, “that it was their responsibility to ensure the company will survive if you cannot raise money for 24 months”.
For individuals, this is akin to advising that we all seriously protect our emergency funds. Having a financial cushion at a time like this isn’t a bad thing.
- It was also stated that the goal of any founder should be to get to “default alive”.
According to Paul Graham, the co-founder of YC; default alive is the ability of a company to reach profitability with its existing capital at the current growth rate and expenses.
In context, default alive for individuals is the ability to remain liquid (or cash flow positive) with current earnings and expenses.
From all indications, the general consensus is that it is imperative that we strive to remain default alive in our finances at times like this.
Till we meet again next week, do have a profitable week!