Questions arise over Y Combinator’s role in startup patching – TechCrunch

A thrill has has come down to the global startup market, but not evenly. Venture capital totals are collapsing in most geographies, and falling stock prices of tech companies large and small have soured sentiment about the future value of high-growth and often cash-hungry startups.

The end of the long startup boom that formed in the wake of the 2008 financial crisis and largely continued through the final months of 2021 is shaking up, changing how the market views certain entities.

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Every economic cycle has winners and losers, heroes and villains. Some previous winners turned out to be losers. Tiger, the mega-crossover fund, has gone from a change agent dominating the tech finance market to a bag holder. SoftBank’s various Vision Fund efforts are suffering. And some crypto investments that seemed like massive gains have exploded.

Torben FrieheCEO of Wingback (YC W22), told TechCrunch earlier this year that many founders he spoke with have decided to put fundraising on hold in the current climate, adding that other founders from “the whole ecosystem ‘say’ if you’re going to fundraise now, you basically have to cut everything you planned to raise in January half.”

The scoreboard of winners and losers is not so difficult to establish. But the heroes and villains registry is a bit more difficult. But with the startup market changing so quickly, a boost is setting in among the investor class. And some are pointing the finger not only at late-stage capital pools that have poured too much cash into the startup market — some startup players are irritated by accelerators, Y Combinator in particular. Let’s talk about it.

The Return of Fear

The latest missives from venture capitalists are once again slowdown letters. We last saw a series of these notes when COVID-19 first hit the world outside of China, bringing economic calamity and lockdowns. Investors have warned startups to buckle up for the bad times. But, as we now know, the bad times never came for most of them.

Instead, ironically, the pandemic has become something of an accelerator, pushing more companies towards tech companies that have helped other companies operate remotely; Accelerated digital transformation has been another tailwind that has buoyed the tech sector, giving startups a boost in the arm.

The latest round of warnings from venture capitalists seem more frequent than what we’ve seen in 2020, leading our own Natasha Mascarenhas noteworthy over the weekend that “everyone writes their own Black Swan startup memo”. Among the various companies that sent advice to their wallets was Y Combinator.

Y Combinator, or YC for short, is the most well-known accelerator in the world. Its growing cohort sizes, semester-long cadence, and “standard deal” have made it a forward-thinking startup program; one that has enough clout to influence the general direction of the early-stage market for funding tech start-ups. And, after starting life offering “about $20,000 for 6% of a business, YC raised its terms in 2020 to “$125,000 for 7% equity on a post-money SAFE,” so only reduced pro rata rights “to 4% of subsequent rounds.

That changed again in early 2022, when YC added a $375,000 ticket to its deal, offered on an uncapped basis but with most favored nation status. Essentially, YC retained its ability to raise 7% of seed equity, with additional capital provided to its portfolio companies to work with.

Over the past few years, YC has raised the valuation bar for its startups from around $333,333 (6% of a company for $20,000) to $1.79 million (7% of a company for $125,000). Additionally, the additional capital it now offers on an uncapped basis likely helped cement early-stage startups’ expectations that their accelerator’s valuation was valid in the market.

Abhinaya Konduruan investor in the Midwest-focused M25 venture capital fund, told TechCrunch that his firm “was skeptical of the valuation practices of a few national accelerators from an investment perspective even before the last two years,” adding that changes to early-stage assessments of selected accelerators – she did not call any program by name – “has made it even more difficult to consider these companies for investment to the point where [M25] stopped looking at them.

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