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VC wells drying up: Y Combinator's latest class shrinks 40%

Time to take another gander at that pitch deck

Venture capital is the latest to feel the pinch from the economic downturn, with venerable Silicon Valley incubator Y Combinator's Summer 2022 cohort consisting of less than 250 companies, down from over 400 last Winter's list - a drop of 40 percent.

Lindsay Amos, Y Combinator's communications director, confirmed to The Register that the incubator had done so intentionally, attributing the reduction to the current state of the economy. Despite the downturn, Amos said, Y Combinator's summer 2022 cohort "is still a large batch relative to the last five years."

"The economic downturn and almost certain resulting changes to come in the venture funding environment, as well as the realities of being back in person, led to our decision to reduce the number of companies we funded," Amos told us. 

Amos said that batch sizes vary because "we are constantly evaluating every aspect of our batches and the environment in which the companies will be operating."

Warnings materialized

Until recently, many venture capitalists saw themselves as immune to economic instability. Recent data points to that not being the case, and while early-stage investments of the kind that Y Combinator provides have been more resilient, VC investment is down across the board.

CrunchBase said that total money invested in startups in the second quarter of 2022 was down 27 percent compared to Q1 2022, and down 25 percent from the same quarter last year. Total quarterly investments this year are still higher than any quarter in 2020, however.

Y Combinator saw the writing on the wall in May, when it wrote a letter to YC Founders warning that "things don't look good," and advising them to plan to be "default alive" instead of aiming for rapid growth. 

"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," the letter said. 

The letter also warned that poorly-performing tech markets mean VCs will have a hard time raising money, and thus won't be investing as much. "This causes less competition between funds for deals which results in lower valuations, lower round sizes, and many fewer deals completed," the letter said. 

As for how the downturn will affect Y Combinator's upcoming winter 2023 cohort, for which applications are now available, Amos told us that YC's plans are unchanged. 

"Before applications close, we will evaluate every aspect of our batch and the environment in which the companies will be operating to determine the batch size," Amos said. ®

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