Sep 4, 2021

Axios Pro Rata

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Today’s Smart Brevity™ count is 992 words, a 3.5-minute read.

1 big thing: Y Combinator's Demo Day loses luster

Illustration: Brendan Lynch/Axios

Y Combinator’s “Demo Day" was once a marquee event for VCs, who gathered in Silicon Valley twice a year to network and watch dozens of buzzy startup pitches. But interest has waned as Demo Day moved online and the number of participating companies ballooned to nearly 400.

Why it matters: YC is one of the most influential entities in the global startup ecosystem, with companies like Airbnb, DoorDash, Stripe and Coinbase making their debuts during Demo Day.

The big picture: After the pandemic forced YC to abruptly conduct its March 2020 Demo Day via Zoom, the entire accelerator program went virtual. Such was the case again earlier this week when YC held its Summer 2021 Demo Day remotely for investors and media.

The good news: Startups no longer have to come to Silicon Valley for the program, after YC for years saying its value could only be fully realized on-premise. It also rolled out new tools to manage the new format.

What they’re saying: “Having run an accelerator, I can tell you that Demo Day pitches have little relation to company quality,” Parker Thompson, TNT Ventures' managing partner tells Axios.

  • “In my opinion, investors are better off looking at a list of companies and reaching out to those that match their thesis, or taking referrals from people who have met with them," he adds. (Unofficial lists of the companies and their fundraising have long circulated among investors ahead of Demo Day.)
  • Many investors told Axios that they now skip most if not all the presentations given sheer size of each graduating class, and instead look into the startups that match their areas of investment.

Between the lines: This might finally pop the narrative that YC startups save their fundraising conversations until Demo Day arrives.

  • “This is an insiders’ game, with everyone from YC partners to YC-affiliated funds getting early looks at companies. Demo Day is a great opportunity for these companies to run an auction for the equity that insiders did not want to buy at prices that are going to make it hard to generate a return,” explained one investor.
  • "Our advice to YC founders has always been to raise money when they have a local maximum of leverage," YC managing director Michael Seibel said via email. "For some companies that moment happens before Demo Day but the vast majority of companies don't finish fundraising until a month after demo day. "

Yes, but: There are still plenty of investors who tune into Demo Day.

  • General Catalyst managing director Niko Bonatsos tells Axios that while his firm has already invested in five companies in this latest group, he still watched every presentation. “Personally, I really love how much of a life changing experience it is, especially for overseas founders."
  • According to YC, more than 1,500 investors tuned into Demo Day this week, generating almost 50,000 investment leads.

The bottom line: The past year has changed startup fundraising, and YC's famed Demo Day is no exception.

2. "The valuations are too damn high"

Illustration: Shoshana Gordon/Axios

Investors have always complained about YC startups asking for sky-high valuations, but this summer the complaints reached a fever pitch, with some startups seeking $50 million pre-money.

Why it matters: No investor wants to overpay — especially at the seed stage where conventional wisdom is that nine startups out of 10 will die.

What’s more: YC this year cut its own investment in participating startups from $150,000 for a 7% ownership stake to $125,000 for the same stake (via SAFE note), slashing the pre-money valuation from just under $2 million to $1.66 million. It also cut its pro rata rights to a 4% cap.

  • Investors have long complained about the discount YC gets and this change has only turned up the volume.

What they're saying: “Pretty much everywhere in venture things have gotten better for founders — more money, higher valuations, less dilution, more favorable terms, more (promised) value-add,” says one investor, who runs a specialized accelerator. “Except YC, where founders now seem to be getting a worse deal.”

YC's response? "[T]he vast majority of YC startups do not do YC for the investment and investors don’t see YC’s investment as setting a valuation," YC's Seibel told Axios.

  • "Startup valuations are set by investors not YC.  As more and more capital moves into the venture industry and flows down to seed funds, valuations for high quality startups will increase."  

The bottom line: Complaining about the YC startups’ valuations remains a time-honored tradition.

3. YC's Greatest Hits

Illustration: Sarah Grillo/Axios

YC has certainly earned its reputation as the top accelerator program in the world in large part because it’s spawned numerous highly valued and publicly traded companies. Here's a top 10 list:

  1. Airbnb: $99 billion market cap, public since Dec. 2020, YC class of Winter 2009.
  2. Stripe: $95 billion valuation, private, YC class of Summer 2009.
  3. Doordash: $65 billion market cap, public since Dec. 2020, YC class of Summer 2013.
  4. Coinbase: $57 billion market cap, public since April 2021, YC class of Summer 2012.
  5. Instacart: $39 billion valuation, private, YC class of Summer 2012.
  6. Cruise: $30 billion valuation, private, YC class of Winter 2014.
  7. Dropbox: $13 billion market cap, public since March 2018, YC class of Summer 2007.
  8. Reddit: $10 billion, private, YC class of Summer 2005.
  9. Brex: $7.4 billion, private, YC class of Winter 2017
  10. PagerDuty: $4 billion, public since April 2019, YC class of Summer 2010

Note: A few private companies are valued at more than PagerDuty's $4 billion, but we wanted to include all YC-funded public companies on this list.

📚 Due Diligence
  • Here are all the companies from Y Combinator’s Summer 2021 Demo Day, Part 1 (TechCrunch)
  • Here are all the companies from Day 2 of Y Combinator’s Summer 2021 Demo Day (TechCrunch)
  • How Y Combinator is super-sizing its startup school to become a global unicorn factory (Business Insider)
🧩 Trivia

Launched in 2005, Y Combinator operates its influential startup accelerator program in the Silicon Valley, but that's not always been the case.

  • Question: Where else did the investment firm operate the program?
🧮 Final Numbers
Expand chart
Data: Y Combinator startup directory; Chart: Thomas Oide/Axios

🙏 Thanks for reading! See you on Tuesday for Axios Pro Rata's weekday programming, and please ask your friends, colleagues and startup founders to sign up.

Trivia answer: Cambridge, Mass., alternating with Mountain View, Calif. in the first few years.