When Loren Straub, general partner at Bowery Capital, started talking to a startup in the latest batch of Y Combinator accelerators a few months ago, he thought it was strange that the company didn't have a lead investor for the round it was raising. Even stranger, the founders didn't seem to be looking for one.
She thought it was an anomaly until she spoke to nine other startups, Straub told TechCrunch. They were all looking to raise almost identical rounds: between $1.5 million and $2 million with a post-money valuation of around $15 million, while giving up only 10% of their companies, apart from the standard YC deal, where it acquires a 7% participation. Most had already raised most of that from multiple angels and only a few hundred thousand dollars worth of stock remained to be sold.
“It was impossible to get a double-digit property in any of the deals,” he said. “At least two of the companies I spoke to had a lot of angels but no institutional capital.”
This dynamic means there are likely to be numerous startups among YC's winter cohort of 249 that won't raise funding from traditional seed investors. That happens with all cohorts, of course, but the difference this time is that traditional seed investors would have liked to fund them. However, many initial investors, like Straub, have a minimum ownership of 10%. In fact, selling 20% of the startup is considered pretty standard for a seed round. Institutional investors also typically require 10% capital to lead a round. In its tips guide for the first stagesYC even says that most rounds require 20%, but also advises, “if you can give up just 10% of your company in your seed round, that's great.”
A YC spokesperson confirmed that they encourage founders to raise only what they need. They also said that since YC improved its standard deal to include $500,000 of equity in 2022, more companies are raising less and looking to give away less capital. YC doesn't spend much time fundraising on the show, a nod to the success of Demo Day, but companies can always discuss it with their group partner, the spokesperson added.
There's nothing wrong with chasing less money (after all, most YC companies are at a very early stage of their journey). However, these startups still seek higher valuations than those that did not attend the famous accelerator. The current median seed deal size is $3.1 million, according to PitchBook data for the first quarter, with a median pre-money valuation of $12 million. YC startups are asking for higher valuations with less money and smaller stakes. This does not include YC's 7% equity stake, which Straub said many companies consider separately.
Straub wasn't the only VC to notice that more YC companies seem to be aiming for that 10% target this time around. Another VC told TechCrunch that in a tough fundraising market such as 2024, YC's 7% stake may prompt startups to seek less dilution, while a third VC said many of the rounds from this batch seemed more pre-seed or family- rounds and friends than seeds.
While valuations are obviously lower than the bull days of 2020 and 2021, with the latest YC batch, “round sizes were also very subdued. “We’re seeing round sizes that look more like $1.5 million and $2 million, and less like larger,” said one institutional VC who looked at potential deals.
Of course, among hundreds of companies in the cohort, there were outliers. Leya, a Stockholm-based ai-powered legal workflow platform, last month announced a $10.5 million seed round led by Benchmark. Drug discovery platform startup Yoneda Labs raised a $4 million seed round in May from Khosla Ventures, among others. Basalt, a satellite-focused software company, raised a $3.5 million seed round in May led by Initialized Capital. ai medical transcription startup Hona raised $3 million from a host of angels, corporate funds, and institutional venture capitalists like General Catalyst and 1984 Ventures.
Just for comparison, Winter 2021 cohort REGENT, an electric marine glider company, raised $27 million in two rounds at a pre-money valuation of $150 million. In 2020, a16z invested $16 million in one of the hottest startups of the summer cohort, internal clearing Pave, formerly known as Trove, for a post-investment valuation of $75 million. YC valuations rose so much in 2021 that they became something of a joke in the industry and in x.com/schlaf/status/1431076974685007872″ target=”_blank” rel=”noreferrer noopener”>social media.
But even as the market began to weaken, YC deals remained expensive. Every (Summer 2023), an accounting and payroll startup, raised a $9.5 million seed round led by Base10 Partners in November 2023. Massdriver (Winter 2022), a DevOps standardization platform, raised $8 million dollars in what it called an angel round in August 2023. led by Constructores VC. BlueDot (Winter 2023) raised a $5 million seed round without any lead investors in June 2023.
What this trend tells us about YC startups
The trend towards smaller rounds shows that the current groups of YC founders have become more realistic about current market conditions. But they also hope that the YC badge will be enough for institutional venture capitalists to ignore ownership requirements for their funds or be willing to pay more than market value to invest in their startups.
Many of these startups will find that being a YC-backed company is not enough to override the investment requirements of a venture capital. And while going through the accelerator program definitely gives these companies a level of prowess compared to startups of the same age that haven't, many VCs simply aren't as interested in startups. YC as before.
Since the heady days when YC's cohorts grew to more than 400 companies, many VCs don't consider the accelerator to be as selective as it once was, even though it has reduced the size of its cohort in recent years. And their new ventures are also believed to be too expensive. Investors complain about inflated valuations in LinkedIn and x.com/Jeffreyw5000/status/1693216678069284983″ target=”_blank” rel=”noreferrer noopener”>twitterand a TechCrunch survey last fall found that venture capitalists who had invested in the past were now out, primarily due to the entry price of these companies.
Companies also seem to feel some of the shine fading. A YC founder in the recent batch told TechCrunch that his startup is raising a more traditional seed round because he was further along in the startup journey when he joined YC. But the person knew of many others who were pursuing smaller rounds because they weren't sure they could raise more at their stage, which makes the higher valuation even more interesting.
“It's become a lot harder to put together $1.5 million and a $15 million (valuation) than it used to be,” the YC founder said. “As a result of that, I think more founders are getting $600,000 and $700,000 and those are the only checks they can get at the end of the day.”
The founder added that some other YC founders will look to raise $1.5 million from angels in hopes of sparking interest from institutional or lead investors after the fact. But as seed funding has increased in recent years and many seed investors are looking to write larger checks, some YC firms are choosing to forgo a lead investor under these conditions.
The pros and cons of a smaller seed
If YC startups treat these rounds more like pre-seed funding, with the intention of raising a seed in the future, that's not all bad. Many startups that raised high seed rounds in 2020 and 2021 at high valuations would likely want to raise less at a lower valuation in the current Series A market crisis. Raising these smaller, less dilutive rounds, mostly from angels , also allows companies to grow a little before generating a suitable seed.
But the risk is that if companies label these smaller rounds as “seed rounds” with an eye toward raising a Series A, they could run into trouble.
Some companies that raise a small seed round won't have enough funds to become what Series A investors are looking for, Amy Cheetham, partner at Costanoa Ventures, told TechCrunch. She also noticed that YC's deals seemed a little smaller than usual this time around.
“I'm concerned that these companies will end up being undercapitalized,” Cheetham said. “They will have to raise an extra seed or whatever they have to do. “There is a problem with that construction.”
And if the startup needs more money between a seed round and Series A, not having institutional sponsors to turn to will make raising that capital a little more complicated. There is no obvious investor to help raise a bridge round or other extension financing. This is particularly true for startups that don't have a lead investor. That tends to mean they don't have any investors with a large network sitting on the board. No investor board member can also mean they have no one to introduce the founder to other investors, greasing the wheels for the next raise.
Many startups realized the downsides of raising funds without a committed lead investor in 2022, when times started to get tough and they didn't have that champion to turn to for money or leverage that person's network.
But YC chairman and CEO Garry Tan doesn't seem all that concerned about that. “While it's helpful to have a good investor, the reason a company lives or dies is not who its investors are, but whether they do something people want,” Tan told TechCrunch via email. “Fundraising is the beginning of a starting line of a new career. What matters is winning the race, not what brand of fuel you put in the tank.”
There have always been YC companies raising smaller rounds and outliers getting big capital checks and valuations, but if more companies lean toward smaller rounds, it will be interesting to see if this discourages early investors who have historically dedicated their time to talk to YC Companies looking for offers.
Ironically, in the long run, that can be a good thing. Those investors may be interested in a Series A.
“I'm probably most excited about getting back to leading the Series A deals that were on the shelf a year or two ago,” Cheetham said. “Some of those prices will work through the system and then you'll be able to write a sizable check on the A. In the best companies, the seed round has been a little difficult to invest in right now.”
