A few months ago, when Bowery Capital general partner Loren Straub began talking to startups from Y Combinator's most recent accelerator batch, she found it odd that the companies didn't have lead investors in their funding rounds. Even odder, the founders didn't seem to be looking for one.
Straub told TechCrunch that he thought this was an anomaly until he spoke to nine other startups. They were all looking for roughly the same funding round: $1.5 million to $2 million, at a post-money valuation of about $15 million, and to give up just 10% of the company. YC's standard deal is for 7% equity, but that's about it. Most of the companies had already raised the bulk of their money from multiple angel investors, leaving them with just a few hundred thousand dollars of stock to sell.
“It was impossible to get double-digit ownership in any of the deals,” she said. “At least two of the companies I spoke to had lots of angel investors but no institutional investors.”
These trends suggest that there are likely many startups in the YC Winter batch of 249 that will never raise money from traditional seed investors. Of course, this happens with every cohort, but the difference this time is that traditional seed investors were willing to fund them. But many seed investors, like Straub, mandate a minimum of 10% equity. In fact, selling 20% of a startup is considered pretty standard in seed rounds. Institutional investors also typically require 10% equity to lead the round. YC, in its early-stage advice guide, says that most rounds require 20%, but advises that “if you can give up 10% of your company in a seed round, that's great.”
A YC spokesperson acknowledged that the company encourages founders to raise only what they need, and said that more companies are raising less and giving away less equity since YC raised its standard agreement to $500,000 in capital in 2022. YC isn't dedicating much time to fundraising in the program following the success of Demo Day, but companies are always free to discuss it with group partners, the spokesperson added.
There's nothing wrong with asking for less funding (after all, most YC companies are in their early stages), but these startups are seeking higher valuations than startups that didn't attend the famed accelerator are actually getting. According to first-quarter PitchBook data, the median seed deal today is $3.1 million, and the median pre-money valuation is $12 million. YC startups are seeking higher valuations with less funding and less equity. This doesn't include the 7% equity from YC that many companies consider separately.
Straub wasn't the only VC to notice more YC companies going for the 10% target this time around: Another VC told TechCrunch that in a tough fundraising market like 2024, startups might seek less dilution with YC's 7% stake, and a third VC said many of the rounds this time around are more like pre-seed or family and friends rounds than seed.
While valuations are obviously lower than during the bull market of 2020 and 2021, in the latest YC batch, “round sizes have also been very subdued, with a lot of rounds in the $1.5 million to $2 million range and not many larger than that,” said an institutional VC looking at potential deals.
Of course, among the hundreds of companies in this group, there were exceptions. Leya, a Stockholm-based AI-powered legal workflow platform, announced a $10.5 million seed round led by Benchmark last month. Yoneda Labs, a drug discovery platform startup, raised a $4 million seed round in May from Khosla Ventures and others. Basalt, a satellite-focused software company, raised a $3.5 million seed round led by Initialized Capital in May. Hona, an AI medical transcription startup, raised $3 million from a number of angel investors, corporate funds, and institutional investors such as General Catalyst and 1984 Ventures.
For comparison, REGENT, an electric seaglider company from the Winter 2021 cohort, raised $27 million in two funding rounds at a pre-funding valuation of $150 million. In 2020, a16z invested $16 million in one of the most talked-about startups from the Summer cohort, internal reward Pave (formerly Trove), at a rumored post-funding valuation of $75 million. YC valuations have gotten so high in 2021 that they've become a bit of a joke in the industry and on social media.
But even as the market began to soften, YC deals remained big-ticket: Every (Summer 2023), a bookkeeping 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 in a round called an angel round led by Builders VC in August 2023. BlueDot (Winter 2023) raised a $5 million seed round in June 2023 with no lead investor.
What does this trend say about YC startups?
The trend toward smaller rounds suggests that YC's current founders are becoming more pragmatic about current market conditions, but they also hope that the YC badge will encourage institutional seed VCs to either ignore fund ownership requirements or be willing to pay above market value to invest in young startups.
Many of these startups will find that being YC-backed is not enough to meet VC investment requirements. While the accelerator program experience certainly gives these companies an edge over their peers who didn't, many VCs are no longer as interested in YC companies as they once were.
Since its heyday, when YC's cohorts grew to more than 400 companies, the accelerator is no longer considered by many VCs to be as selective as it once was, though cohort sizes have shrunk in recent years. The accelerator's startups are also considered too expensive: Investors have complained on LinkedIn and Twitter about inflated valuations, and a TechCrunch investigation last fall found that VCs who had previously invested in these companies are now holding off, mainly due to the high cost of entry.
Companies also seem to feel the shine is fading. One founder of a recent YC participant told TechCrunch that his startup was so far along in its journey when it joined YC that it raised a traditional seed round. But he knows plenty of other companies that want smaller rounds because they don't feel confident they can raise money at that stage, making the rising valuations all the more intriguing.
“It's become a lot harder to invest $1.5 million and $15 million. [valuation] “There are more people working together than ever before,” the YC founder said, “and as a result, I think more founders are getting $600,000 or $700,000 in funding, and that's the only check they're going to get in the end.”
The founder added that some other YC founders have tried to raise $1.5 million from angel investors in hopes of garnering interest from institutional or lead investors after the fact, but as seed funds have gotten bigger in recent years and many seed investors are looking to write bigger checks, some YC companies are choosing to forgo a lead investor in these situations.
The pros and cons of small seeds
It's not all bad if YC startups treat these rounds like pre-seed funding and intend to raise seed in the future. Many startups that raised seed rounds at high valuations in 2020 and 2021 are likely regretting raising less money at lower valuations amid the current Series A market crisis. Raising these smaller, less dilutive rounds, primarily from angel investors, also allows companies to grow a bit before raising proper seed.
But there is a risk that if companies label these smaller funding rounds as “seed rounds” and then go after Series A funding, they could run into problems.
Some companies that have raised small seed rounds don't have the capital they need to grow to the level that Series A investors are looking for, Costanoa Ventures partner Amy Cheatham told TechCrunch, adding that she's also noticed that this year's YC round is a bit smaller than usual.
“I worry that these companies are going to end up undercapitalized,” Cheatham said. “They're going to have to raise seed money or do what needs to be done. There's something wrong with the structure.”
And if a startup needs more funding between the seed and Series A rounds, it's a bit harder to get that money if they don't have an institutional investor to fall back on. There's no obvious investor to help them with a bridge round or other expansion fundraising. This is especially true for startups without a lead investor, which means no investor with a large network and a board seat. Not having an investor on the board also means there's no one to introduce founders to other investors to help smooth the way to the next round of funding.
In 2022, as things started to get tough, and with no champion to lean on for funding or leverage their network, many startups realized the drawbacks of raising capital without a committed lead investor.
But YC president and CEO Garry Tan doesn't seem too worried about that. “Having good investors is helpful, but companies survive or die based on whether they're building something people want, not who their investors are,” Tan told TechCrunch via email. “Fundraising is the start of a new race. It's about winning the race, not what brand of fuel you have in the tank.”
There have always been YC companies that raise smaller rounds and outliers that raise large amounts of capital and valuations, but as more companies lean toward smaller rounds, it will be interesting to see whether seed investors who have traditionally negotiated with YC companies to find deals shy away from them.
Ironically, in the long run, that might actually be a good thing: those investors might be interested in your Series A.
“I'm probably more excited to be leading another Series A deal that we put together a year or two ago,” Cheatham said. “Some of the pricing works through the system and then we're able to write a sizable check at the A. Seed rounds are feeling a little tougher right now for the best companies.”