Facebook IPO Flop Leaves Start-ups to Tighten Belt

What hath Facebook wrought?

In a letter to his stable of companies that he says wasn’t supposed to go public, Paul Graham, the influential head of startup incubator and angel investor Y Combinator, tells them to lower their funding expectations and to be more conservative in their spending.

Reflecting on the underwhelming Facebook IPO and its possible effect on the startup scene, Graham writes:

If it means new startups raise their first money on worse terms than they would have a few months ago, that’s not the end of the world, because by historical standards valuations had been high. Airbnb and Dropbox prove you can raise money at a fraction of recent valuations and do just fine. What I do worry about is (a) it may be harder to raise money at all, regardless of price and (b) that companies that previously raised money at high valuations will now face “down rounds,” which can be damaging.

Try to be fiscally responsible, he urges.

The startups that really get hosed are going to be the ones that have easy money built into the structure of their company: the ones that raise a lot on easy terms, and are then led thereby to spend a lot, and to pay little attention to profitability. That kind of startup gets destroyed when markets tighten up. So don’t be that startup.

Some Silicon Valley observers have expressed surprise at the tone of Graham’s letter given that he and his Y Combinator have been among the Valley’s most exuberant startup boosters. In fact, Y Combinator finds and funds young companies by holding twice-yearly open auditions that are the buzz of the Valley. Will the next auditions be a bit less buzzy?

Related Links

Y Combinator’s Paul Graham Warns Start-Ups to Lower Funding Expectations  [All Things D]

Paul Graham’s Letter to YC Companies  [Y Combinator]

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