Welcome to Startups Weekly, a nuanced look at this week’s startup news and trends by Senior Reporter and Equity co-host Natasha Mascarenhas. Subscribe to receive it in your inbox here.
The new era of Y Combinator, with smaller batches, a refocus only on early stage investments and a new CEO, is well underway. As the gotechbusiness.com team went through hundreds of startup pitches during YC’s biennial demo day, the backdrop of change was certainly noticed.
First, a majority of early-stage investors I’ve spoken to have complained about the valuations coming out of the cohort, saying it’s getting too expensive to invest. It’s a conversation that bubbles up again and again around Demo Day, but given the recession, some expected to see valuations that they believe are more realistic for companies that are only a few months old. I also hear that YC’s new standard deal, especially the most favored nation clause, has played a role in encouraging founders to pursue higher valuations.
There was a time when a startup fresh out of the program was picked up with a valuation of over $30 million, only to be beaten the following year, when another startup from YC picked up with a valuation of $75 million. (Both of the aforementioned rounds were led by A16z, and to be fair, A16z wasn’t complaining to me about early valuations).
For me, high ratings have always been the talk around YC. I don’t know what will change it, whether it’s a new competitor, a new influx of check writers as some leave, or whether the conversation should go away at all. I will say if you’re building something that people want, that’s great – you just have to keep that “need” alive as you build new iterations of that first product.
Garry Tan, YC’s new CEO, seemingly addressed some of the appreciation conversations on Twitter. writing more broadly that “value investing in a company is like limiting your search for your lost keys under only brightly 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 an idea is bad, it usually means a great market that many people are looking for… 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 memo to the founders to “plan for the worst.”
…During economic downturns, even the best big money VC funds slow their deployment of capital (lesser funds often stop investing or die). This reduces competition between funds for deals, resulting in lower valuations, smaller round sizes and far fewer deals completed.
In these situations, investors also reserve more capital to bail out their best-performing companies, further reducing the number of new financings. This slowdown will disproportionately impact global companies, high-asset companies, low-margin companies, hard tech and other companies with high burnout and long time to revenue.
What I would really like is that when YC posts its blog post introducing the batch, it would also provide some sort of analysis of what percentage of startups are raising $8 million valuations versus $20 million valuations versus $45 million valuations. I wonder if it can clear up some misconceptions (or hey, I’ll even assume if they’re confirmed!). While we’re at it, the percentage of startups that go on to raise a Series A would also be a fascinating data point.
Now, even if valuations have not fallen for some YC startups, some of the advice mentioned above has been heeded, particularly around the slowdown that will be felt for global companies. Only 21% of the publicly announced startups in the Winter 2023 batch are internationally based, compared to 42% in the batch before.
Anyway, that’s what I think about when I come out of Demo Day. I always enjoy the two-day pitch-off because it gives us a glimpse of what’s the top priority for an entire group of founders, some of whom are trying to put meat back into plant-based meats.
Here are some of our pieces for further reading:
In the rest of this newsletter, we talk about horizontal verticals and data breaches. As always you can follow me Twitter or Instagram to continue the conversation. If you like to support me extra, sign up 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, the new nickname for Hayes Valley as it is being overtaken by tech enthusiasts and builders in the AI space. I ended up writing a whole story about how people ride the hype wave and try their best not to fall off.
Here’s another takeaway: The AI boom isn’t just about startups building AI tools; it’s every startup trying to integrate AI – from Duolingo to a direct-to-consumer company – to stay competitive. As a result, investors don’t really need to invest in net new companies to gain exposure to AI’s potential halo effect. If all of your portfolio companies start integrating with the right existing tools in the market, they can thrive too. It is the promise of horizontal technology.
Never leak data, especially if you’re building this
On Equity this week, we talked about a shocking data breach that TC’s Zack Whittaker broke: “Alcohol recovery startups Monument and Tempest shared patients’ private 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, photos, unique digital identifiers, as well as “what services or subscriptions the patient uses,” appointment information and ratings, and survey responses submitted by the patient, including detailed responses about a person’s alcohol consumption and use to determine their course of treatment. The uniquely vulnerable customer base that Monument and Tempest both work with further complicates the years-long leak. As we said on the show, never leak data, especially if you’re building this.
Seen on gotechbusiness.com
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Seen on gotechbusiness.com+
The first batch of upcoming potential unicorn IPOs is looking good
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Without the Stripe and OpenAI deals, global VC results in Q1 2023 would have been even worse
And finally, a note on the devastating loss of Bob Lee, an entrepreneurial force
Bob Lee, chief product officer at Mobile Coin and the creator of Cash App, was murdered in San Francisco last week. The stream of messages that followed the confirmation of Lee’s untimely death – messages from Block’s Jack Dorsey to Figma’s Dylan Field – offered a glimpse into just how much power he was within technology. My condolences to his family and may he rest in peace.
Be careful and tell your people you love them,