Has a chill descended into the global startup market, albeit not evenly. Venture capital totals are declining in most regions, and falling stock prices for large and small tech companies have soured sentiment about the future value of high-growth and often money-hungry startups.
The end of the protracted startup boom that first emerged in the wake of the 2008 financial crisis and largely continued through the closing months of 2021 is shaking up and changing how the market sees certain entities.
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Every economy has winners and losers, heroes and villains. Some previous winners turned out to be losers. Tiger, the mega-crossover fund, has evolved from a market-dominant technology finance change agent to a bag holder. The various efforts of SoftBank’s Vision Fund are suffering. And some crypto investments that appeared to be huge profits sputtered.
Torben FrieheCEO of fullback (YC W22), earlier this year told gotechbusiness.com that many founders he spoke to have decided to delay fundraising in the current climate, adding that other founders from “the entire ecosystem” say “that if you need good money collect now you actually have to delete everything you planned to collect in January in two†
The scorebook for winners and losers is not that difficult to draw up. But the hero and villain book is a bit more difficult. But with the startup market changing so, so fast, whiplash is becoming one of the investment classes. And some aren’t just pointing the finger at late-stage capital pools that have poured too much liquidity into the startup market — some startup players are annoyed by accelerators, especially Y Combinator. Let’s talk about it.
The Return of Fear
The latest letters from venture players are again downward letters. We last saw a round of these notes when COVID-19 first hit the world outside of China, leading to economic disasters and lockdowns. Investors warned startups to scramble for bad times. But as we now know, the bad times never came for most of them.
Instead, ironically, the pandemic became a sort of accelerator, pushing more companies toward technology companies that helped other companies operate remotely; an accelerating digital transformation was another tailwind that boosted the tech sector, giving startups a shot in the arm.
The latest venture capitalist warning appears to be more common than we saw in 2020, sparking our own Natasha Mascarenhas to note over the weekend that “everyone is drafting their own Black Swan memo.” Among the several companies sending advice to their portfolios was Y Combinator.
Y Combinator, or YC for short, is the world’s most famous accelerator. Its growing cohort sizes, biennial cadence, and “standard deal” made it a leading startup program; one that has enough strength to influence the general direction of the market early on for financing technology start-ups. And after that start life offer “about $20,000 for 6% of a company,” YC increased his conditions in 2020 to “$125,000 for 7% equity on a SAFE in arrears”, along with reduced pro-rata rights “to 4% of subsequent rounds”.
That changed again in early 2022, when YC added a $375,000 note to its deal, offered on an unlimited basis but with most favored nation status. Essentially, YC maintained its ability to raise 7% of its seed capital early, with additional capital being provided to its portfolio companies to get to work.
In recent years, YC has raised the valuation bar for its startups, from about $333,333 (6% of a company for $20,000) to $1.79 million (7% of a company for $125,000). In fact, the additional capital it now offers on an unlimited basis probably helped cement early expectations that their accelerator valuation was in line with the market.
Abhinaya Konduruan investor at Midwest-focused venture fund M25told gotechbusiness.com that her company had “for the past few years been skeptical of the valuation practices of some national accelerators from an investment standpoint,” adding that changes in early valuations of select accelerators — she did not name any program by name — “made it even harder to consider those companies for an investment to the point where” [M25] stopped looking at them.”