Welcome to Startups Weekly, a nuanced take on this week’s startup news and trends by Senior Reporter and co-host of Equity Natasha Mascarenhas. To receive this in your inbox, subscribe here.
The new era of Y Combinator, with smaller lots, a new focus on just early-stage investing, and a new CEO, is in full swing. As the TechCrunch team watched hundreds of startup launches during YC’s biannual Demo Day, the backdrop of change was certainly noticeable.
For one, most 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 in. It’s a conversation that comes up around Demo Day time and time again, but given the recession, some expected to see valuations they think are more realistic for companies that are only a few months old. I’ve also heard that YC’s new standard deal, specifically its most-favoured-nation clause, has played a role in incentivizing founders to seek higher valuations.
There was a time when a startup, fresh out of the show, raised a valuation of over $30 million, only to be surpassed the following year, when another YC startup raised a valuation of $75 million. (The aforementioned two rounds were led by A16z, and to be fair, A16z didn’t complain to me about early-stage valuations.)
For me, high ratings have always been the conversation around YC. I don’t know what will change it, if it’s a new competitor, a new influx of check writers as some leave, or if the conversation needs to die down 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 create new iterations of that first product.
Garry Tan, the new CEO of YC, apparently addressed some of the valuation talk on Twitter. writing more broadly that “Value investing in ventures is like restricting your search for your lost keys to only under well-lit streetlights.”
Tan added in the same thread: “Competition and high valuations exist because big potential markets represent big potential outcomes. Competition doesn’t mean a market or an 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 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 blue chip VC funds with deep pockets slow their deployment of capital (lesser funds often stop investing or die). This causes less competition between funds for transactions, which translates into lower valuations, smaller round sizes, and far fewer completed transactions.
In these situations, investors also reserve more capital to support their best-performing companies, further reducing the number of new financings. This slowdown will have a disproportionate impact on global companies, asset-rich companies, low-margin companies, hard technology, and other companies with high consumption and long time to revenue.
What I would really love is if, when YC does their blog post introducing the lot, they would also offer some sort of analysis on what percentage of startups are rising at $8 million valuations versus $20 million valuations versus $45 valuations. millions. I’m wondering if you can clear up some misconceptions (or hey, I’ll even take it if they confirm them!). 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 haven’t gone down for some YC startups, some of the aforementioned advice has been taken, specifically around the slowdown 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 launch because it gives us a sense of what’s top priority for a whole bunch of founders, some of whom are trying to put meat back on plant-based meat.
These are some of our pieces to read more:
In the rest of this newsletter, we’ll talk about horizontal verticals and data leaks. As always, you can follow me on Twitter either instagram to continue the conversation. If you feel like supporting me extra, subscribe to my personal (and free!) Substack.
Another AI to take away for you
Last week, a founder told me that “there are too many opportunities” in Cerebral Valley, the new moniker for Hayes Valley as it finds itself 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 takeout: The AI boom is not just about startups creating AI tools; it’s any startup that’s trying to integrate AI, from Duolingo to a direct-to-consumer business, to stay competitive. As a result, investors don’t really need to invest in net startups to expose themselves to the potential halo effect of AI. If all of your portfolio companies begin to integrate with the right tools on the market, they too could flourish. It is the promise of horizontal technology.
Never leak data, but especially if you’re building this
In Equity this week, we talked about a shocking data breach that TC’s Zack Whittaker broke: “Alcohol recovery startups Monument and Tempest shared private patient data with advertisers.” More than 100,000 patients are affected.
Here’s what you should know: Data shared with advertisers includes patient names, phone numbers, photo, unique digital identification, as well as “what services or plan the patient is using, appointment information, and patient-submitted survey and evaluation responses, including responses information about a person’s alcohol consumption. consumption and is used to determine your course of treatment. The exceptionally vulnerable client base that Monument and Tempest work with further complicates the years-long leak. Like we said in the show, never filter data, but especially if you’re building this.
Etcetera etcetera.
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And finally, a note on the devastating loss of Bob Lee, a business force
Bob Lee, product manager for Mobile Coin and creator of Cash App, was murdered last week in San Francisco. The flurry of messages that followed the confirmation of Lee’s untimely death (texts from Block’s Jack Dorsey to Figma’s Dylan Field) offered a window into the strength he had within the technology. He sends his condolences to his family and may he rest in peace.
Take care, and tell your people you love them,