Welcome to Startups Weekly, an in-depth look at this week’s startup news and trends by the Chief Stock Correspondent and co-host. Natasha Mascarenhas. To get this in your inbox, subscribe here.
The new Y Combinator era, with smaller payouts, a refocus solely on early-stage investing and a new CEO, is in full swing. As the TechCrunch team sat through hundreds of startup demos during YC’s semi-annual demo day, the background change was definitely noticed.
For example, the majority of early-stage investors I’ve spoken to have complained about valuations from the group, saying it’s too expensive to invest in. It’s a conversation about the demo over and over again, but given the economic downturn, some have expected to see valuations they think are more realistic for companies that are only a few months old. I also heard that YC’s new benchmark deal, specifically the most favored country clause, played a role in incentivizing founders to pursue higher valuations.
There was a time when a startup, fresh out of the program, raised a valuation north of $30M, only to be overtaken the following year, when another YC startup raised a valuation of $75M. (Both of the aforementioned rounds were led by the A16z, and to be fair, the A16z didn’t complain to me about the early stage ratings.)
For me, high ratings have always been the debate around YC. I don’t know what would change it, whether it be a new competitor, a new influx of check writers with some leaving, or whether the conversation needed to disappear in the first place. I will say that if you’re building something that people want, great – you just have to keep that “want” alive as you build new iterations of that first product.
Gary Tan, the new CEO of YC, appears to have brought up some valuation conversations on Twitter. Writing more broadly that “the value of investing in the project is like restricting your search for lost keys under only brightly lit street lamps.”
In the same thread, Tan added, “Competition and high valuations exist because large possible markets represent large potential outcomes. Competition doesn’t mean a market or idea is bad, it usually means a great market that a lot of people want… The best investors tend not to use heat as a signal in a way or another.”
A lot has changed since May 2022, when YC sent a memo to the founders to “plan for the worst.”
… During economic downturns, even higher-tier VC funds with a lot of money slow the deployment of capital (lower-tier funds often stop investing or die). This results in less competition between funds for trades which leads to lower valuations, lower round sizes, and far fewer trades completed.
In these situations, investors also hold more capital to support their top-performing companies, which reduces the number of new financings. This slowdown will have a disproportionate impact on international companies, asset-heavy companies, low-margin companies, hard tech, and other high-performance companies that are taking too long to generate revenue.
What I really like is, when YC publishes a post on their blog defining the batch, they will also give some sort of analysis on what percentage of startups are amassing $8M valuations vs. $20M vs. $45M valuations. I wonder if he can clear up some of the misconceptions (or hey, I’d even accept it if they confirmed it!). While we’re at it, the percentage of startups that continue to raise a Series A would also be a great data point.
Now, even if the valuations for some of the YC startups don’t drop, some of the above advice has been followed, especially about the slowdown that international companies will feel. Only 21% of the publicly announced startups in the Winter 2023 cohort are based internationally compared to 42% in the previous cohort.
Anyway, that’s what came to my mind coming out of the day of the show. I always enjoy the two-day show because it gives us a glimpse of what is a top priority for an entire segment of founders, some of whom are trying to bring meat back to vegan.
Here are some of our pieces for further reading:
In the rest of this newsletter, we talk about horizontal sectors and data leaks. As always, you can follow me Twitter Or Instagram to continue the conversation. If you’d like additional support from me, subscribe to my personal (and free!) Substack.
Another fast AI for you
Last week, one of the founders told me that “there’s a lot of opportunity” in Cerebral Valley, the new nickname for Hayes Valley where tech enthusiasts and AI builders are outgrowing it. I ended up writing a whole story about how people ride the hype wave and do their best not to fall for it.
Here’s another tip: The AI ”boom” isn’t just about startups building AI tools; It’s any startup trying to integrate AI — from Duolingo to direct-to-consumer business — to stay competitive. As a result, investors don’t really need to invest in net new companies to get a sense of the potential halo effect of AI. If all of your portfolio companies start merging with the right existing tools in the market, it could also thrive. It’s the promise of horizontal technology.
Image credits: anthropic
Never leak data, but especially if you’re building this
On Equity this week, we talked about a shocking data leak by TC’s Zack Whittaker: “Alcohol recovery startup Monument and Tempest shared private patient data with advertisers.” More than 100,000 patients are affected.
Here’s what you should know: The data shared with advertisers includes patient names, phone numbers, photos, and a unique digital ID as well as “the services or plan the patient is using, appointment and evaluation information, and questionnaire responses provided by the patient, which includes responses that detail a person’s alcohol consumption and is used to determine a course of treatment.” It operates. The uniquely weak customer base that both Monument and Tempest have been working with has compounded the leak over more years. Like we said in the demo, never leak data, but especially if you’re building this.
Image credits: Andrei Onofrinko/Getty Images
etc., etc.
Seen on Techcrunch
Twitter will not allow you to retweet, like or reply to Substack links
After a decade, the VR treadmill is finally ready to ship
The knife is so sharp that you don’t feel like it’s being cut
Bots are already here
Apple (re)invents the iPod
Seen on TechCrunch+
Unicorn’s first set of potential upcoming IPOs is shaping up nicely
3 Notes from Substack’s newly released financial results
Funds making “friends and family” checks can make the change that under-represented founders need
Without the Stripe and OpenAI deals, global venture capital results would have been worse in the first quarter of 2023
And finally, a note about the devastating loss of Bob Lee, an entrepreneurial powerhouse
Bob Lee, Chief Product Officer of Mobile Coin and founder of the Cash App, was murdered last week in San Francisco. The flood of letters that followed confirmation of Lee’s untimely death — letters from Block’s Jack Dorsey to Dylan Field of Figma — provided a window into just how much power there was in technology. My sincere condolences to his family, may God have mercy on him.
Take care of yourself and tell your people that you love them,