- VC firm Y Combinator told startups in its portfolio to think about other ways to fundraise in 2022.
- This comes at a time when VC investments are dropping and tech firms are laying off workers.
- Founders outline other ways to raise money, like personal loans, frugal living, and credit cards.
The Silicon Valley venture-capital firm Y Combinator told startups in its portfolio that raising funds could get difficult this year.
"No one can predict how bad the economy will get, but things don't look good," said the letter, which was titled "economic downturn" and sent to founders planning to raise funding in the next six to 12 months. "The safe move is to plan for the worst."
Y Combinator's letter comes at a time when tech firms are implementing hiring freezes and layoffs because they're anticipating a recession later this year. Venture-capital investments are dropping, too: A May report by Crunchbase News found that the value of VC investments had dropped by $5 billion between March and April.
But raising venture capital isn't the only way to fund a business. Insider spoke with three founders who explained how they successfully started and scaled their companies without venture capital.
Determine the best type of financing based on your revenue
The funding expert Arielle Loren — who is also the founder of the first business-funding app for women, 100K Incubator — broke funding options into three levels based on a business' monthly revenue ranging from $0 to more than $100,000.
At level one are businesses that earn under $3,000 a month and haven't established proof of concept yet. Level-one funding options include business credit cards, personal loans, home-equity loans, and crowdfunding. Loren said these worked best because these founders hadn't started making a serious profit. As a result, they shouldn't take out funding that they might not be able to repay.
Businesses at level two earn $3,000 or more a month in sales and are on track to reach six figures a year. Loren lists funding options such as pitch competitions, government contracts, government small-business loans and private business loans, payment-processor loans, and business lines of credit for companies to consider. These are good options for businesses that have just started earning steady revenue and are looking to expand.
The final level comprises companies that earn $9,000 or more a month in sales. For businesses that might not want to pursue venture capital based on the recent warnings, angel investing is another option. Business owners can consider this when their companies are showing enough growth to pursue serious funding.
Additionally, the biggest advantage for businesses in level three is that there's nothing to repay. However, it also means that the owner will be giving up more of their equity and therefore more parties can be involved in making decisions.
When money is tight, use a spreadsheet to track expenses
Shereen Campbell started her online business My Little Magic Shop selling crystals, gemstones, and jewelry with $3,400 from a tax refund. She wanted to track every dollar she was investing in her business and used a detailed budget spreadsheet to organize expenses like savings, debt payments, and paychecks.
She also created a second spreadsheet that tracked her company's revenue, traffic, and sales targets. This helped her scale the business, and she now books $12,000 a month in revenue.
"Being so diligent about creating and maintaining these two spreadsheets really, really helped to keep me focused, disciplined, and strategic," she previously told Insider.
Set a frugal budget and stick to it
Jeremy Schneider said the key to successfully building his business RentLinx, an advertising website for rental properties, was living frugally. He stuck to a fixed budget for grocery shopping, drove an older car, and paid himself a minimum salary to keep costs low while scaled the young startup.
"I had a roommate, and our rent was $1,400, so I was paying half of that," he previously told Insider. "It was very frugal living."
In 2015, 12 years after he started RentLinx, he sold it for $2 million.