A NEW ERA IN STARTUP FUNDING: NAVIGATING THE JOURNEY THROUGH Y COMBINATOR'S LATEST STRATEGY

Startups have long been associated with risk, disruption, capital-seeking and ambition, but the newest crop of Y Combinator (YC) startups has a preference for smaller, more modest seed rounds. It would be easy to interpret this as evidence that the venture capital land grab of the last few years has slowed. But a closer look illustrates a strategy that leads to more sustainability and optimisation – and may even change what it means to succeed in tech.

THE ROAD LESS TRAVELED: SEEKING SMALLER SEED ROUNDS

It’s the story of how the startups in the most buzzed-about batch of Y Combinator accelerator programmes are trying to raise ‘smaller seed rounds’ – another way of saying ‘way less money’ than you’d normally hear. According to Loren Straub, general partner at Bowery Capital, her conversations with a lot of these YC startups found that many preferred to raise ‘a $1.5 million to $2 million seed round instead of this large $3 million to $4 million seed round like they previously went after.’

NAVIGATING THROUGH ANGELS AND VALUATIONS

The path smaller and smaller rounds is fraught with dangers. As these startups go back out to raise capital, they will have to try to persuade angel investors to give them a $15 million post-money valuation while not giving up much equity. The narrow path is narrow indeed – YC’s standard 7 per cent stake will be a large part of that equity. Smaller rounds mark another part of a new strategy: building value, control and a solid base in the turbulent early stage market.

THE DILEMMA OF INSTITUTIONAL INVESTMENT

It’s at the crossroads with institutional capital where this journey poses its greatest challenge. Many seed investors expect to own at least 10 per cent of the company in order to lead a round, which leaves very little room under a YC startup’s new script. Perhaps the YC way will redirect institutional money up through the Series A and force VCs to rethink their strategies, or even lower their sights to the Series As.

EMBRACING THE TWIST IN THE PATH

Regardless, while the early seasons of YC initially saw a uniform valuation of <$300,000 for all participants, outliers still exist. On the one extreme, a few YC participants from 2022 have entered and closed multi-million dollar seed rounds this year, such as Leya, an NFT startup, and Yoneda Labs, an image analysis business. These are important outliers that contour the complex landscape of how startups get funded today, and illustrate that the path to seed rounds and growth is uneven and not a fixed continuous journey.

THE CROSSROADS: POTENTIAL PERILS AND PROSPECTS

This change trend towards smaller, less dilutive series A rounds means both good and bad news for YC startups. While on one hand the safeguard against overvaluation and the potential pitfalls of large, inflated series A rounds is positive, it can also be seen as a foreshadowing of the difficulties of the transition to series A without the strong foundation of support provided by excessively large seed rounds. This dichotomy of a start-up culture that strikes a balance between showing ambition and being careful in a post-dotcom world is a perfect example of startups moving away from exponential growth to sustainable growth models.

REFLECTING ON THE JOURNEY

Current changes in the startup funding landscape – wherein YC startups are not just looking for money but reshaping the meaning of success and sustainability in the venture world – could lead to renewed caution or a redrawing of the roadmap altogether. Either way, it’s the ride, not the destination, that counts.

THE ESSENCE OF JOURNEY

At its heart, the experience of these YC startups calls into question established practices; it provokes questions about the nature of startups, at what point they are worth the most, at what point they grow, and the broader role of venture capital. This flight from the startup status quo reflects the soul-searching happening between founders, investors and other stakeholders: What does it look like to build something enduring? In the coming years, these founders’ fates will continue to shape the terrain of innovation, investment and entrepreneurship.