When Bowery Capital general partner Loren Straub started talking to a startup from the last batch of Y Combinator accelerators a few months ago, he thought it was odd that the company didn’t have a lead investor for the round it was raising. Even more surprising, the founders didn’t seem to be looking for one.
He thought it was an anomaly until he talked to about nine other startups, Straub told TechCrunch. All were trying to raise roughly the same rounds: $1.5 million to $2 million at a post-money valuation of about $15 million, while giving up only 10% of their companies — except for YC’s standard deal, where it takes a 7% stake. Most had raised most of this already from many angels with a few hundred thousand dollars worth of stock left to sell.
“It was impossible to get double-digit ownership in any of the deals,” he said. “At least two of the companies I talked to had a bunch of angels but no institutional capital.”
This dynamic means there are likely many startups among YC’s 249-person winter batch that won’t raise any revenue from traditional investors. This happens with every team, of course, but the difference this time is that traditional seed investors would like to fund them. However, many startup investors, like Straub, have a minimum stake of 10%. In fact, selling 20% of the startup is considered pretty typical for a startup cycle. Institutional investors typically require 10% equity to lead a round as well. Inside early stage advice guideYC even says that most rounds require 20%, but also advises, “if you can get away with just 10% of your company in the first round, that’s great.”
A YC spokesperson confirmed that they encourage founders to raise only what they need. They also said that since YC increased its standard deal to include $500,000 in capital in 2022, more companies are raising less revenue and trying to offer less equity. YC doesn’t spend a lot of time fundraising in the program, a nod to the success of Demo Day, but companies can always talk about it with their team partner, the spokesperson added.
There is nothing wrong with looking for less money (most YC companies are very early in their journey after all). However, these startups are still looking for higher valuations than startups that didn’t participate in the famous accelerator get in the wild. The current median startup deal size is $3.1 million, according to PitchBook’s first-quarter data, with the median pre-money valuation sitting at $12 million. YC startups are asking for bigger valuations with less money and smaller stakes. That doesn’t include YC’s 7% stake, which Straub said many companies are looking at separately.
Straub wasn’t the only VC to notice that more YC companies seem to be aiming for that 10% goal this time around. Another VC told TechCrunch that in a tough fundraising market — like 2024 — YC’s 7% stake may prompt startups to seek less dilution, while a third VC said many of the rounds in this batch looked like more with pre-seed or family-and-friends rounds than seed.
While valuations are obviously down from the wild bull days of 2020 and 2021, with the latest batch of YC, ’round sizes were also very subdued. You see round sizes that are more like $1.5 million and $2 million, less that are bigger,” said one institutional VC who has reviewed potential deals.
Of course, out of the hundreds of companies in the cohort, there were outliers. 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 created one $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 has raised $3 million from a slew of angels, venture capital and institutional VCs such as General Catalyst and 1984 Ventures.
Just for comparison, REGENT, from the Winter 2021 team, an electric marine slope 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 compensation Pave, formerly known as Trove, for a rumored $75 million post-money valuation. YC’s valuations got so high in 2021, they became somewhat of a joke in the industry and social media.
But even as the market began to soften, deals at YC remained expensive. Every (Summer 2023), an accounting and payroll startup, raised a $9.5 million round led by Base10 Partners in November 2023. Massdriver (Winter 2022), a DevOps standardization platform, raised $8 million in which it called an angel round in August 2023 led by Builders VC. BlueDot (Winter 2023) raised a $5M round with no lead investor in June 2023.
What this trend tells us about YC startups
The trend toward smaller rounds shows that YC’s current founder batches have become more realistic about current market conditions. But they also expect the YC signal to be enough for institutional VCs to either ignore their fund’s ownership requirements or be willing to pay above market value to invest in their new startups.
Many of these startups will find that being a YC-backed company simply isn’t enough to bypass a VC’s investment requirements. And while transitioning from the accelerator program certainly 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 YC companies as they once were.
Since the heady days when YC’s cohorts grew to more than 400 companies, the accelerator is not considered as selective as it once was by many VCs—even though its cohort size has shrunk in recent years. And his start-ups are also considered very expensive. Investors complain about inflated valuations on LinkedIn and Twitterand a TechCrunch survey last fall found that VCs who had invested in the past were now out of business largely because of the price of entry for these companies.
Companies also seem to be feeling some of the shine fading. One YC founder in the recent batch told TechCrunch that their startup is developing more of a traditional startup cycle because they were further along in the startup journey when they joined YC. But the person knew many others who were looking for smaller rounds because they weren’t sure they could raise more in their stage, which makes the higher valuation all the more interesting.
“It’s a lot harder to put in $1.5 million and $15 million [valuation] together than it used to be,” said the YC founder. “As a result of that, I think more founders like $600,000 and $700,000 and that’s the only check they can get at the end of the day.”
The founder added that some other YC founders will try to raise $1.5 million from angels in hopes of garnering interest from institutional or top investors after the fact. But as seed funds have grown in recent years and many seed investors are looking for bigger checks, some YC companies are choosing to forego a lead investor under these circumstances.
The pros and cons of a smaller seed
If YC startups are treating these rounds more like pre-funding to grow their lineup, it’s not all bad. Many startups that raised high seed rounds in 2020 and 2021 at high valuations likely wanted to raise less at a lower valuation in the current Series A market crunch. Raising these smaller, less dilutive rounds, mostly from angels, also allows companies to grow just before planting a suitable seed.
However, the risk is that if companies characterize these smaller rounds as “crowded rounds” with the goal of raising a Series A next, they may run into trouble.
Some companies that raise a small seed round won’t have enough capital to grow into what Series A investors are looking for, Amy Cheetham, a partner at Costanoa Ventures, told TechCrunch. He also noticed that the YC deals seemed a bit smaller than usual this time around.
“I’m concerned that these businesses are ultimately not capitalized,” Cheetham said. “They should raise a seed plus or whatever they need to do. There is a problem with this build.”
And if the startup needs more money between a seed and Series A round, not having institutional backers to turn to will make getting that capital a little more difficult. There is no obvious investor to help raise a bridge round or other financing expansion. This is especially true for startups that don’t have a lead investor. This tends to mean they don’t have an investor with a large network holding a board position. No investor board members 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 negative consequences of scaling up without a dedicated 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 too worried 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 it does something people want,” Tan told TechCrunch via email. “Raising money is the beginning of a starting line of a new struggle. It’s about winning the race, not what brand of fuel you put in the tank.”
There have always been YC companies that raise smaller rounds and extremes that score large capital checks and valuations, but if more companies lean toward smaller rounds, it will be interesting to see if that deters seed investors who have historically spent their time talking to YC Companies. who are looking for deals.
Ironically, in the long run, this may actually be a good thing. These investors may be interested in a Series A.
“I’m probably more excited to come back to drive the Series A deals that were in a batch a year or two ago,” Cheetham said. “Some of those prices will work through the system, and then you can go and write a pretty big check to A. In the best companies, the seed round felt a little difficult to invest right now.”
