In 2024, Many Y Combinator Startups Only Want Small Seed Rounds, But There's a Catch

When Bowery Capital general partner Loren Straub started talking to a startup from the latest Y Combinator accelerator batch a few months ago, she found it strange that the company didn't have a lead investor for the round it raised. Even stranger, the founders didn't seem to be looking for it.

She thought it was an anomaly until she spoke to about nine other startups, Straub told JS. They were all looking for nearly identical rounds: $1.5 million to $2 million with a post-money valuation of about $15 million, while giving up just 10% of their businesses — not counting YC's standard deal, in which it took a stake of 7% takes. Most had already raised most of that from multiple angels, with only a few hundred thousand dollars of stock left to sell.

“It was impossible to get double-digit ownership on any of the deals,” she said. “At least two of the companies I spoke to had a set of angels, but no institutional capital.”

This dynamic means there are likely countless startups among the 249-strong YC winter batch that won't raise from traditional seed investors at all. That happens with every cohort, of course, but the difference this time is that traditional seed investors would have been happy to fund them. However, many startup investors, like Straub, have a minimum of 10% equity ownership. In fact, selling 20% ​​of the startup is considered fairly standard for a seed round. Institutional investors also typically require 10% equity to lead a round. In his early stage advice guideIn fact, YC says that most rounds require 20%, but also advises, “If you can manage to 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 increased its standard deal by $500,000 in capital in 2022, more companies are raising less money and looking to give away less equity. YC doesn't spend much time on fundraising in the program, a nod to the success of Demo Day, but companies can always talk about it with their group partner, the spokesperson said.

There's nothing wrong with looking for less money (after all, most YC companies are still very early in their journey). However, these startups are still seeking higher valuations than the startups that did not attend the legendary accelerator. The current average seed deal size is $3.1 million, according to first-quarter data from PitchBook, with the median pre-money valuation sitting at $12 million. YC startups demand bigger valuations for less money and smaller stakes. This does not include YC's 7% equity stake, which Straub says is being considered separately by many companies.

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 JS that in a tough fundraising market – as 2024 is – YC's 7% stake could push startups to seek less dilution, while a third VC said many of the rounds in this batch would be more pre- -seed or family laymen. and-friends rounds then seed.

While valuations are clearly lower than during the wild bull days of 2020 and 2021, with the latest YC batch, “round sizes have also been very restrained. You see round sizes that are more likely to be in the $1.5 million to $2 million range, and fewer that are larger,” said one institutional venture capitalist looking at potential deals.

Of course, there were outliers among the hundreds of companies in the cohort. 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 has a $4 million seed round in May from Khosla Ventures, among others. Basalt, a software company focused on satellites, raised a $3.5 million seed round led by Initialized Capital in May. AI medical transcription startup Hona has raised $3 million from a host of angel, corporate and institutional VCs such as General Catalyst and 1984 Ventures.

By comparison, REGENT, from the Winter 2021 cohort, an electric sea glider company, has 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 post-money valuation of $75 million. YC valuations got so high in 2021 that they became kind of a joke in the industry and all social media.

But even as the market started to soften, 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 in what it called an angel round in August 2023. led by Builders VC. BlueDot (Winter 2023) raised a $5 million seed round in June 2023 without a lead investor.

What this trend tells us about YC startups

The trend towards smaller rounds shows that YC's current group of founders has become more realistic about current market conditions. But they also expect that the YC badge will be enough for institutional seed VCs to either ignore their fund's ownership requirements or be willing to pay more than market value to invest in their young startups.

Many of these startups will find that being a YC-backed company is not enough to avoid a VC's investment requirements. And while going through the accelerator program certainly gives these companies a level of competency compared to startups of the same age that haven't done so, many VCs simply aren't as interested in YC companies as they once were.

From the heady days when YC cohorts grew to more than 400 companies, the accelerator is no longer considered as selective by many VC firms as it once was – even as the cohort size has shrunk in recent years. And the startups are also considered too expensive. Investors complain about inflated valuations LinkedIn And TweetA JS investigation last fall found that venture capital funds that had invested in the past were now lagging behind mainly because of the price of entry into these companies.

The companies also seem to be feeling some of the shine fading. One YC founder from the recent batch told JS that their startup is raising more of a traditional seed round because it was further along in the startup journey when it joined YC. But the person knew many others who were looking for smaller rounds because they weren't confident they could raise more at their stage, which makes the higher valuation all the more interesting.

“It has become significantly more difficult to bet $1.5 million and $15 million [valuation] together than before,” said the YC founder. “As a result, I think more founders like $600,000 and $700,000 and those are the only checks they can end up getting.”

The founder added that some other YC founders will look to raise $1.5 million from angels, hoping to attract interest from institutional or lead investors after the fact. But as seed funds have grown larger in recent years and many seed investors want to write 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 view these rounds more as pre-seed funding, with the intention of raising a seed later, it's not all bad. Many startups that raised high seed funding rounds at high valuations in 2020 and 2021 likely wished they had raised less at a lower valuation in the current Series A market crisis. Growing these smaller, less dilutive rounds, usually from angels, also allows companies to grow a bit before they can grow a good seed.

But the risk is that if companies label these smaller rounds as “seed rounds” with their sights set on the next Series A rounds, they could find themselves in trouble.

Some companies that raise a small seed round won't have enough money to grow into what Series A investors are looking for, Amy Cheetham, a partner at Costanoa Ventures, told JS. She also noticed that YC deals seemed a little smaller than usual this time.

“I'm concerned that these companies will ultimately become undercapitalized,” Cheetham said. “They're going to have to grow a seed plus or whatever they have to do. There is a problem with that construction.”

And if the startup needs more money between a seed and Series A round, not having institutional backers to turn to will make obtaining that capital a little trickier. There is no obvious investor who can help raise a bridge round or other expansion financing. This is especially true for startups that do not have a main investor. This usually means that they do not have an investor with a large network with a board seat. No member of an investor's board of directors can also mean that there is no one who will introduce the founder to other investors and grease the wheels for the next raise.

Many startups realized the downsides of raising 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 to leverage that person's network.

But YC president and CEO Garry Tan doesn't seem too concerned about that. “While it is useful to have a good investor, the reason a company lives or dies is not who the investors are, but whether they make something people want,” Tan told JS via email. “Fundraising is the start of a starting line for a new race. Winning the race is what matters, not what brand of fuel you put in the tank.”

There have always been YC companies launching smaller rounds, and outliers scoring big capital checks and valuations, but as more companies lean toward smaller rounds, it will be interesting to see if this deters early-stage investors who have historically spent their time with talking to YC companies looking for deals.

Ironically, that can actually be a good thing in the long run. Those investors may be interested in a Series A.

“I'm probably more excited to get back to leading 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 start writing a big check to the A. The seed round for the best companies felt a little challenging to invest in at the moment.”

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