Welcome to Startups Weekly, a nuanced take on this week’s startup news and trends from Senior Reporter and co-host of Equity Natacha Mascarenhas. To receive it in your inbox, subscribe here.
The new era of Y Combinator, with smaller lots, a focus only on start-up investments and a new CEO, is in full swing. As the TechCrunch team witnessed hundreds of startup presentations during YC’s semi-annual demo day, the backdrop for the change was certainly noted.
For one thing, the majority of newbie investors I spoke to complained about the valuations coming out of the cohort, saying it was getting too expensive to invest in. It’s a conversation that bubbles around Demo Day time and time again, but given the slowdown, some expected to see valuations they felt were more realistic for companies that were only a few months old. I’m also hearing that YC’s new standard deal, particularly its most-favoured-nation clause, has played a role in spurring founders to seek higher valuations.
There was a time when a startup fresh out of the program raised a valuation north of $30 million, only to be beaten the following year when another YC startup raised a valuation of $75 million. (Both of the aforementioned rounds were conducted by A16z, and to be fair, A16z didn’t complain to me about the early-stage ratings).
For me, high valuations have always been the conversation around YC. I don’t know what’s going to change that, whether it’s a new competitor, a new influx of check writers as some leave, or if the conversation even has to die out in the first place. I will say that if you build something that people want, that’s great – you just have to keep that “want” alive as you build new iterations of that first product.
Garry Tan, YC’s new GM, apparently addressed some of the review conversations on Twitter. writing more broadly that “value investing in venture capital is like restricting your search for your lost keys to only well-lit streetlights”.
Tan added in the same thread: “Competition and high valuations exist because large possible markets represent large possible outcomes. Competition doesn’t mean a market or idea is bad, it usually means a big market that a lot of people want… The best investors tend not to use heat as a signal one way or another .
A lot has changed since May 2022, when YC sent a note to the founders to “plan for the worst”.
… During economic downturns, even top VC funds with lots of money slow down their deployment of capital (smaller funds often stop investing or die). This reduces competition between funds for deals, resulting in lower valuations, lower cycle sizes, and far fewer deals closed.
In these situations, investors are also setting aside more capital to support their most successful companies, which further reduces the number of new financings. This slowdown will disproportionately impact international businesses, asset-heavy businesses, low-margin businesses, hard tech, and other high-consumption, long-time-to-revenue businesses.
What I would really like is that when YC publishes its blog post showcasing the lot, it also offers some kind of analysis on the percentage of startups that raise $8 million valuations versus $20 million valuations dollars against valuations of $45 million. I wonder if that might dispel some misconceptions (or hey, I’ll even take it if they confirm them!). While we’re at it, the percentage of startups that raise a Series A would also be a fascinating data point.
Now, even though valuations haven’t come down for some YC startups, some of the aforementioned advice has been followed, particularly around the downturn that will be felt for international companies. Only 21% of publicly announced startups in the Winter 2023 batch are internationally based, compared to 42% in the previous batch.
Anyway, that’s what worries me the most coming out of Demo Day. I always enjoy the two-day pitch-off because it gives us insight into what’s top priority for a whole slice of founders, some of whom are trying to put meat back into plant-based meat.
Here are some of our pieces for further perusal:
In the rest of this newsletter, we talk about horizontal vertical markets and data leaks. As always, you can follow me on Twitter or Instagram to continue the conversation. If you want to support me more, subscribe to my personal (and free!) substack.
Another AI takeaway for you
Last week, a founder told me that “there are too many opportunities” in Cerebral Valley, Hayes Valley’s new moniker, as it’s overtaken by tech enthusiasts and builders in the technology space. ‘IA. I ended up writing a whole story about how people are riding the wave of hype and trying their best not to fall.
Here’s another takeaway: The AI “boom” is not just about startups building AI tools; it’s any startup trying to incorporate AI — from Duolingo to a direct-to-consumer business — to stay competitive. As a result, investors don’t really need to invest in net new companies to expose themselves to the potential AI halo effect. If all the companies in your portfolio start integrating with the right tools in the market, they might also flourish. This is the promise of horizontal technology.
Picture credits: anthropogenic
Never leak data, but especially if you’re building this
On Equity this week, we wrote about a shocking data leak TC’s Zack Whittaker uncovered: “Alcohol recovery startups Monument and Tempest shared private patient data with advertisers.” More than 100,000 patients are affected.
Here’s what you need to know: Data shared with advertisers includes patient names, phone numbers, photo, unique digital ID, as well as “what services or plan the patient is using, appointment information, and responses to patient-submitted assessment and survey, which include detailed responses about a person’s alcohol consumption and used to determine their treatment.The particularly vulnerable clientele that Monument and Tempest work with further complicates the leak that has been going on for years. Like we said on the show, never give out data, but especially if you’re building this.
Picture credits: Andriy Onufriyenko/Getty Images
Etc.
Seen on TechCrunch
Twitter won’t let you retweet, like or reply to Substack links
A decade later, this VR treadmill is finally ready to ship
A knife so sharp you don’t feel it cut
The robots are already here
Apple (re)invents the iPod
Seen on TechCrunch+
The first group of potential upcoming unicorn IPOs are looking good
3 takeaways from Substack’s recently released financial results
Funds offering ‘friends and family’ checks could bring the change underrepresented founders need
Without the Stripe and OpenAI deals, global venture capital results would have been even worse in the first quarter of 2023
And finally, a note on the devastating loss of Bob Lee, an entrepreneurial force
Bob Lee, product manager at Mobile Coin and creator of Cash App, was killed last week in San Francisco. The outpouring of messages that followed the confirmation of Lee’s untimely death — messages from Block’s Jack Dorsey to Figma’s Dylan Field — offered a window into his strength within technology. I send my deepest condolences to his family and may he rest in peace.
Take care and tell your people you love them,
Tech
