When Bowery Capital general partner Loren Straub began talking to a startup from Y Combinator’s newest batch of accelerator a few months ago, she thought it was odd that the company didn’t have a lead investor for the round it was raising. Stranger still, the founders didn’t appear to be looking for him.
She thought it was an anomaly until she talked to nine other startups, Straub told TechCrunch. They all wanted to lift almost similar rounds: $1.5 million to $2 million with a post-money valuation of around $15 million, while giving up only 10% of their corporations – on top of the standard YC deal, which requires a 7% stake. Most have already raised most of that quantity from multiple angels, with only a few hundred thousand dollars of stock left to sell.
“It was not possible to obtain a double-digit ownership value in any of the transactions,” she said. “At least two companies I talked to had an angel group but no institutional capital.”
This dynamic implies that YC’s 249-person winter batch likely includes many startups that will not be raising capital from traditional seed investors at all. This happens with every cohort, in fact, but the difference this time is that traditional seed investors would really like to fund them. However, many seed investors like Straub have a minimum of 10% equity. In fact, selling 20% of a startup is considered fairly standard in a seed round. Institutional investors also typically require 10% equity to lift a round. In my early stage advice guideYC even says that almost all rounds require 20%, but also advises, “If you can only give away 10% of your company in a seed round, that’s great.”
A YC spokesperson confirmed that it encourages founders to gather only what they need. They also said that since YC increased its standard $500,000 equity deal in 2022, more corporations are raising less and willing to offer away less capital. YC doesn’t spend a lot of time fundraising through the program, a nod to Demo Day’s success, but corporations can all the time discuss it with their group partner, the spokesman added.
There’s nothing mistaken with looking for less money (after all, most YC corporations are very early in their journey). However, these startups still demand higher valuations than those obtained by startups that didn’t participate in the famous accelerator. According to PitchBook’s first quarter data, the current median seed deal size is $3.1 million and the median pre-money valuation is $12 million. YC startups are asking for larger quotes for less money and lower rates. That doesn’t include YC’s 7% equity stake, which Straub said many corporations are considering individually.
Straub wasn’t the only VC to note that more YC corporations were pushing toward the 10% goal this time around. Another VC told TechCrunch that in a tough fundraising market – like 2024 – YC’s 7% stake may lead startups to hunt lower dilution, while a third VC said many of the rounds in the batch looked more like pre-seed or family rounds i-friends than seeds.
While valuations are obviously lower in comparison with the wild bull days of 2020 and 2021, for the latest batch of YC, ’round sizes have also been very limited. You see round sizes that are roughly $1.5 million and $2 million, with fewer being larger,” said an institutional VC who analyzed the potential deals.
Of course, there have been outliers among the tons of of corporations in the cohort. Leya, a Stockholm-based AI-powered legal workflow platform, announced a $10.5 million seed round last month led by Benchmark. Drug discovery platform startup Yoneda Labs has raised approx $4 million seed round in May, among others from Khosla Ventures. Basalt, a satellite-focused software company, raised a $3.5 million seed round led by Individualized Capital in May. Hona, an AI medical transcription startup, has raised $3 million from multiple angels, corporate funds and institutional enterprise capital funds resembling General Catalyst and 1984 Ventures.
By comparison, Winter 2021 cohort REGENT, an electric glider company, raised $27 million in two rounds at a preliminary valuation of $150 million. In 2020, a16z invested $16 million in one of the most buzzed-about startups of this summer’s cohort, internal compensation company Pave, formerly generally known as Trove, which has an estimated post-money valuation of $75 million. YC valuations have reached such high levels in 2021 that they have grow to be something of a joke in the industry and beyond social media.
But whilst the market began to melt, YC offerings remained expensive. Every (Summer 2023), an accounting and payroll startup, raised a $9.5M seed round led by Base10 Partners in November 2023. Massdriver (Winter 2022), a DevOps standardization platform, raised $8 million dollars as a part of the so-called angel round in August 2023 led by Builders VC. BlueDot (Winter 2023) raised a $5 million seed round without a lead investor in June 2023.
What does this trend tell us about YC startups?
The trend toward smaller rounds shows that YC’s current founding cohorts have grow to be more realistic about current market conditions. However, additionally they expect that the YC logo will be enough for institutional seed enterprise capital funds to either ignore fund ownership requirements or be willing to pay above market value to take a position in their young startups.
Many of those startups will discover that being a YC-backed company is not enough to beat VC investment requirements. And while participating in an accelerator program definitely gives these corporations a level of performance in comparison with startups of the same age that have not done so, many VCs simply aren’t as interested in YC corporations as they once were.
Since the heady days when YC cohorts grew to over 400 corporations, the accelerator is not regarded as selective because it once was by many VCs – although cohort size has shrunk in recent years. His startups are believed to be too expensive. Investors complain about inflated company valuations LinkedIn AND Twitterand a TechCrunch survey last fall found that VCs that have invested in the past are now unlikely to get in, largely attributable to the price of entry for these corporations.
Businesses also appear to be feeling their shine fade. One YC founder from the last group told TechCrunch that their startup was more of a traditional seed round because when he joined YC, he was further along in his startup journey. But this person knew of many others who were looking for smaller rounds because they weren’t sure they may raise more at their stage, which makes the higher valuation all the more interesting.
“It’s much harder to come up with $1.5 million and $15 million [valuation] together than before,” said the founder of YC. “As a result, I think more and more founders are making around $600,000 and $700,000, and that’s the only check they get at the end of the day.”
The founder added that some of YC’s other founders will be seeking to raise $1.5 million from angels, hoping to draw interest from institutional or anchor investors after the fact. However, as seed funds have grown in size in recent years and many seed investors are willing to put in writing larger checks, some YC corporations are foregoing a lead investor in such circumstances.
Pros and cons of smaller seeds
If YC startups treat these rounds more like pre-seed funding, with the intention of raising seeds in the future, it is not so bad. Many startups that raised large seed rounds at high valuations in 2020 and 2021 likely wished that they had raised less at a lower valuation in the current market downturn Series A. Raising these smaller, less dilutive rounds, primarily from angels, also allows corporations to little development before they grow suitable seeds.
However, there is a risk that if corporations mark these smaller rounds as “seed rounds” and aim to lift one other Serie A, they might encounter problems.
Some corporations that raise a small seed round won’t have enough funding to grow to be what Series A investors are looking for, Amy Cheetham, partner at Costanoa Ventures, told TechCrunch. She also noted that YC’s offerings seemed a bit smaller than usual this time around.
“I’m concerned that these companies will become undercapitalized,” Cheetham said. “They will have to grow seeds plus or whatever else they should do. There is a problem with this structure.
And if a startup needs extra money between its seed round and Series A round, the lack of institutional backers to show to will make getting that capital a little tougher. There is no obvious investor who could help raise a bridge round or otherwise finance the expansion. This especially applies to startups that do not have a principal investor. This normally means they do not have a well-networked investor with a seat on the board. Nor can an investor’s board member mean that there is no one there to introduce the founder to other investors, greasing the wheels for the next raise.
Many startups realized the failures of raising capital without a committed lead investor in 2022 when times began to get tough and that they had no champion to show to for money or to tap into that person’s network.
But YC president and CEO Garry Tan doesn’t seem particularly concerned. “While having a good investor is helpful, the reason a company lives or dies is not who its investors are, but whether they create something people want,” Tan told TechCrunch by email. “Fundraising is the starting line of a new race. What matters is winning the race, not the brand of fuel you fill up with.”
There have all the time been YC corporations that raise smaller rounds and outliers that get big capital and valuation checks, but if more corporations gravitate toward smaller rounds, it will be interesting to see if that daunts seed investors who have frolicked in the past talking to YC corporations are looking for offers.
Ironically, this may increasingly actually be a good thing in the future. These investors may have an interest in Series A.
“I’m probably more excited about getting back to doing Series A deals that were done a year or two ago,” Cheetham said. “Some of those prices will go through the system and then you can write a big check to A. For the best companies, the seed round has been a little bit difficult to invest in right now.”