Hundreds gathered this week at San Francisco’s Pier 48 to observe the more than 200 companies in Y Combinator’s Winter 2019 cohort present their two-minute pitches. The audience of venture capitalists, who jointly manage hundreds of billions of dollars, noted their favorites. The very best investors, however, had already had their pick of the litter.
What many don’t realize about the Demo Day tradition is that pitching isn’t a requirement; in actuality, some YC graduates skip out on their stage chance altogether. Why? Since they’ve already increased capital or are in the final stages of closing a deal.
ZeroDown, Overview.AI and Catch are one of the startups in YC’s W19 batch that forwent Demo Day this week, having already pocketed venture capital. ZeroDown, a financing solution for real estate purchases in the Bay Area, raised a round up of $10 million at a $75 million valuation, sources inform TechCrunch. ZeroDown hasn’t responded to requests for comment, nor has its rumored lead investor: Goodwater Capital.
Without requiring a down payment, ZeroDown purchases houses outright for clients and helps them work toward ownership with monthly payments depending on their income. The organization was founded by Zenefits co-founder and former chief technology officer Laks Srini, former Zenefits chief operating officer Abhijeet Dwivedi and Hari Viswanathan, a former Zenefits staff engineer.
The founders’ experience building Zenefits, despite its shortcomings, helped ZeroDown garner substantial buzz ahead of Demo Day. Sources tell TechCrunch the startup had actually raised a small seed around ahead of YC from former YC president Sam Altman, who recently resigned from the role to concentrate on OpenAI, an AI research firm. Altman is said to have encouraged ZeroDown to v respected Silicon Valley accelerator program, which, if nothing else, grants its businesses a priceless network with which no other incubator or accelerator can compete.
Overview . AI’s founders’ resumes are impressive, too. Russell Nibbelink and Christopher Van Dyke were previously engineers at Salesforce and Tesla, respectively. An industrial automation startup, Overview is developing a smart camera capable of learning a machine’s routine to detect deviations, crashes or anomalies. TechCrunch hasn’t been able to get in touch with Overview’s team or pinpoint the size of its seed around, though sources confirm it skipped Demo Day due to a deal.
Grab, for its part, closed a $5.1 million seed round co-led by Khosla Ventures, Kindred Ventures, and NYCA Partners before Demo Day. Rather than pitching their medical insurance platform at the big event, Catch published a blog article announcing its first feature, The Catch Health Explorer.
“This is just the first glance of what we’re building this season,” Catch wrote in the blog article. “In a month or two, we’ll be bringing end-to-end medical insurance enrollment for individual plans into Catch to provide the best health insurance enrollment experience in the country. ”
Four more startups, Truora, Middesk, Glide and FlockJay had prices in the last stages when they walked onto the Demo Day stage, deciding to make their pitches instead of skip the big finale. Sources tell TechCrunch that renowned venture capital firm Accel spent in both Truora and Middesk, among other YC W19 graduates. Truora offers quick, reliable and affordable background checks for the Latin America market, while Middesk does due diligence for businesses to help them conduct risk and compliance assessments on customers.
In the end, Glide, which enables users to efficiently create well-designed mobile apps from Google Sheets webpages, landed assistance from First Round Capital, and FlockJay, the operator an internet sales academy that teaches job seekers from underrepresented backgrounds the skills and training they need to follow a career in technology earnings, secured investment from Lightspeed Venture Partners, according to sources familiar with the deal.
Pre-Demo Day M&A
Raising ahead of Demo Day isn’t a new phenomenon. Companies, because of the invaluable YC network, increase their chances at raising, as well as their evaluation, the moment they enroll in the accelerator. They can begin chatting with VCs when they see fit, and they’re encouraged to mingle with YC alumni, a process which can result in pre-Demo Day acquisitions.
This year, Elph, a blockchain infrastructure startup, was purchased by Brex, a buzzworthy fintech unicorn that itself graduated from YC just two decades back. The deal closed just 1 week before Demo Day. Brex’s head of engineering, Cosmin Nicolaescu, tells TechCrunch that the Elph five-person team — including co-founders Ritik Malhotra and Tanooj Luthra, who previously founded the Box-acquired startup Steem — were being eyed by several larger companies as Brex negotiated the deal.
“For me, it was important to get them batch day because that opens the floodgates,” Nicolaescu told TechCrunch. “The reason I really enjoyed them is they are quite entrepreneurial, which contrasts with what we want to do. Each of our products is really like its own business. ”
Of course, Brex delivers a credit card for startups and has no plans to dabble with blockchain or cryptocurrency. The Elph team, rather, will bring their infrastructure security know-how into Brex, helping the $1.1 billion company build its next solution, a credit card for big enterprises. Brex declined to disclose the terms of its acquisition.
Hunting for the best deals
Finally, it’s up to startups to ascertain the cost at which they’ll give up equity. YC businesses raise capital under the SAFE version , or a simple agreement for future equity, a sort of fundraising invented by YC. Basically, an investor makes a cash investment in a YC startup, then receives company stock at a later date, typically upon a Series A or post-seed thing. YC made the switch from investing in startups on a pre-money safe basis to a post-money safe in 2018 to make cap table math easier for founders.
Michael Seibel, the chief executive officer of YC, says the accelerator works with each startup to develop a personalized fundraising program. The businesses that raise at valuations north of $10 million, he clarified , do so due to high demand.
“Each company decides on the quantity of money they want to raise, the valuation they want to raise at, and when they want to start fundraising,” Seibel told TechCrunch through email. “YC is only an advisor and does not dictate how our businesses operate. The huge majority of organizations complete fundraising from the 1 to 2 months following Demo Day. According to our information, there’s little correlation between the companies who are most in demand on Demo Day and ones who go on to become extremely profitable. Our advice to founders is not to optimize the fundraising process. ”
Though Seibel says the vast majority raise in the months after Demo Day, it appears the best investors know to be proactive about reviewing and investing in the batch before the big event.
Khosla Ventures, like other top VC firms, meets with YC companies as early as possible, spouse Kristina Simmons tells TechCrunch, even scheduling interviews with companies in the interval between when a startup is accepted to YC to before they actually begin the program. Another Khosla spouse, Evan Moore, echoed Seibel’s statement, asserting there isn’t a correlation between the future unicorns and the ones that raise capital ahead of Demo Day. Moore is a co-founder of DoorDash, a YC graduate currently worth $7.1 billion. DoorDash closed its first round of capital in the weeks after Demo Day.
“I think a lot of the action before demo day is driven by investor FOMO,” Moore wrote in an email to TechCrunch. “I’ve had investors ask me how to enter a company without even understanding what the company does! I mostly see this as a side effect of a good thing: YC has helped tip the scale toward founders by creating an environment where investors compete. This dynamic isn’t exactly what many investors are used to, so every batch some whine about valuations and how easy the founders have it, but making it easier for ambitious entrepreneurs to get funding and pursue their vision is a good thing for the market. ”
This year, given the number of recent changes at YC — namely the size of its most recent batch — there was additional pressure on the accelerator to showcase its very best group yet. And while some did inform TechCrunch they were especially impressed with the lineup, others really expressed frustration with valuations.
Many YC startups are fundraising at valuations at or higher than $10 million. For context, that’s actually perfectly in line with the median seed-stage evaluation in 2018. According to PitchBook, U.S. startups increased seed rounds at a median post-valuation of $10 million last year; so much this year, businesses are raising seed rounds at a slightly higher post-valuation of $11 million. With that said, a number of the startups in YC’s cohorts are not as mature as the average seed-stage company. Per PitchBook, a company may be several years old before it secures its seed around.
I did not talk to a single company in this batch raising under $10M post (admittedly I just managed to speak with a small percent of the 205).
— Peter Rojas (@peterrojas) March 20, 2019
Nonetheless, pricey deals can come as a disappointment to the seed investors who find themselves at YC annually but because their reputations aren’t as lofty as say, Accel, aren’t able to reserve pre-Demo Day meetings with YC’s top of course.
The question is who’s Y Combinator serving? And the answer is founders, not investors. YC is under no obligation to serve up deals of a specific valuation nor is it responsible for which investors gain access to its best companies at what time. After all, startups are raking in larger and larger rounds, earlier in their lifespans; shouldn’t YC, a microcosm for the Silicon Valley startup ecosystem, counsel their startups to bill the best investors the going rate?
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