Turn down for what?  – TechCrunch

Turn down for what? – TechCrunch

Welcome to Startups Weekly, a fresh people-first take on this week’s startup news and trends. To get this in your inbox, subscribe here.

Gumroad’s Sahil Lavingia broke into the venture world as one of the early testers of the rolling fund, an AngelList product that allows investors to raise capital on a subscription-like basis. That was in 2020. Fast forward to 2022 and a lot has changed.

One of those changes? Number of places from entrepreneurs who want to raise. “Since March, it’s down about 90%,” Lavingia told TechCrunch. “I probably saw more than most — about 20 to 40 well-searched decks a week — and that number is down to about two to four a week now.” He has also seen the quality of talent increase for people wanting to work for Gumroad – which he attributes in part to the steady wave of layoffs – and a decline in founders starting companies.

A decline in the number of founders raising capital suggests that early-stage startups are not as immune to macroeconomic changes as some investors claim; in contrast, a boom in fresh startups would support the idea that recessions—and the accompanying wave of layoffs—are the times when startups are born.

Lavingia breaks down the condition of founders into three buckets: “tourist founders, immigrant founders and ‘born and bred’ founders.” Tourist entrepreneurs, he said, are those who only start companies in bull markets, a cohort he said has declined by about 100%.

“They are rarely fundable in bear markets,” Lavingia said. “They have to hire other people to build things.” Immigrant entrepreneurs, meanwhile, care less about the reputation and status of starting a company, but weigh risk and return. This founding cohort has been halved, according to Lavingia. Finally, “born and bred” entrepreneurs are founders regardless of market: “They have all existed and therefore raised money in 2020-2021, so they are not starting companies and raising money at the same rate.

There are two sides forming in early-stage venture capital: the investors who admit that talent has changed, and those who stand by deal flow as high as ever.

If you want to read my full opinion, check out my TechCrunch+ column, “Investors Prepare for a Founder Downturn. Or Inflow. Wait, What?”

In the rest of this newsletter, we check in on Y Combinator on its shrinking class size and debut fund managers on their collective mood. As always, you can support me by forwarding this newsletter to a friend or follow me on Twitter.

Y Combinator cuts class size

Y Combinator says it has intentionally reduced the number of startups in its accelerator for the summer 2022 batch. As first reported by The Information and independently verified by TechCrunch, Y Combinator’s summer 2022 cohort — currently in action — has nearly 250 companies, down 40% from the previous cohort, which landed at 414 companies.

Here’s why it’s important: Over the years, Y Combinator’s ever-growing batch size has become a common—if not cliché—conversation among technologists. I know this because we contribute a lot to this conversation (especially at Equity). The biggest problem people have had with YC’s growing class size is that it threatens one of the accelerator’s biggest value propositions: networking. The larger the class, the harder it is to stand out.

While YC says it wasn’t cut due to criticism or the cost of the increasing check size, the move will certainly help those in the current cohort stand out, simply due to a lack of competition.

Image credit: Bryce Durbin

First-time fund managers have thoughts

TechCrunch+ Rebecca Szkutak has spearheaded the latest investor survey, which takes a temperature check from seven first-time fund managers who are at the start of a downturn. What advantages do first-time VCs have over more experienced competition in a challenging market? What steps are they taking to prepare for the fourth quarter? What keeps them up at night given today’s market conditions? These are all questions they answer and more in the piece now available on the website.

Here’s what’s important: There is always a silver lining, but especially if you have a smaller portfolio. Szkutak gives us a teaser excerpt below:

“We don’t carry any of the baggage that can come with having previous funds or having a lot of capital tied up in what appear to be very overpriced vintages,” Stuto said. “Just like a founder, who sees the world differently than subject matter experts, we (first-time managers) provide a new perspective on how certain problems and industries are evolving.”

Read Szkutak’s surveyand her additional analysis of iton the side.

A fully fruited orange tree harvested in a barren desert landscape in Southern California;  first-time investors who thrive in downturns

Image credit: Stephen Swintek (opens in new window) / Getty Images

If you missed last week’s newsletter

Read it here: “The boots are coming, the boots are coming.” I also recorded a companion podcast with my favorite colleague, Alex, which you can listen to here: “Time to Jump on the Venture Treadmill?”

Any requests for topics I can dig into, either at Startups Weekly or at the show? Tweet me a big question and I’ll take a swing at it, either in an upcoming Startups Weekly or at Equity.

Image of white headphones hanging against a blue background.

Image credit: Martin Barraud (opens in new window) / Getty Images

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And it’s a wrap. I’m going to the sea to enjoy these last summer weekends. Take care of yourself!

Talk to you soon,

N

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