VC Says Y Combinator Founders Raising Less Money Signals Shift

Venture capitalists are observing a trend where Y Combinator founders are raising less money than in previous years, signaling a shift in startup funding. This change reflects evolving investor priorities, with a focus on sustainability and profitability rather than rapid expansion. The decrease in funding could indicate a more cautious investment approach in the tech startup ecosystem, as VCs reassess risk and long-term value in the face of market uncertainties.

Silicon Valley has been intrigued by AI's potential, not just as a tool to boost productivity, but as a way to build successful companies with smaller, more efficient teams than before.

AI startups are emerging quickly, reaching millions in revenue while employing as few as 20 people. With lower overhead, some of these startups are opting to take less venture capital funding, particularly in the early stages. Terrence Rohan, an investor with Otherwise Fund and a Y Combinator backer since 2010, has noticed a "vibe shift" among some of the current Y Combinator founders.

He shared a founder's perspective on X last week: “People used to climb Everest and needed oxygen. Today, people climb it without oxygen. I want to summit Everest and use as little oxygen (VC) as possible.” This sentiment wasn’t due to a lack of venture interest. According to Rohan, the round was oversubscribed, with many VCs eager to invest.

Alexis Ohanian, co-founder of Reddit and founder of VC firm Seven Seven Six, called the founder a "smart founder." Raising less capital allows founders to keep a larger share of their companies, giving them more control and future options, Rohan explained to TechCrunch. In fact, YC startups are increasingly raising less funding than initially offered, as reported last year. However, Parker Conrad, CEO and co-founder of Rippling, a $13.4 billion HR tech company, disagrees that less funding is beneficial for startups.

He wrote on X, “A competitor will raise more capital, invest in R&D, build a better product, and crush this guy with sales and marketing. You have to play the game on the field.” While a small engineering team can build a solid product, Conrad argues that more funding accelerates growth and product development. Rohan acknowledges Conrad's point but believes that the landscape is changing. He explained, “People are reaching significant revenue more quickly with fewer employees, and there’s a belief that this can be sustained.”

It's too early to determine if Rohan and the founders are right, as AI companies are still raising considerable funds. For instance, Anysphere, maker of the AI-coding assistant Cursor, hit $100 million in annual recurring revenue (ARR) with just 20 people. Anysphere is now in discussions to raise funds at a $10 billion valuation, just months after its last round. Similarly, ElevenLabs, an AI voice-cloning company, achieved a similar ARR with 50 employees. The company raised a $180 million Series C at a $3.3 billion valuation in January, likely when its ARR was around $80 million, according to TechCrunch.

Anysphere’s team has since grown to 90, while ElevenLabs now has 200 employees, based on PitchBook data. Other AI startups are also raising funds rapidly, proving that startups are still eager to secure capital, even with small teams. “VCs are very persuasive and throw money,” Rohan said, adding that these startups are likely raising funds with minimal ownership dilution. However, YC founders are now more aware of the pros and cons of venture capital, Rohan noted.

Startups that raised funds at inflated valuations during the 2020 and 2021 boom were later forced to secure capital at much lower valuations, known as down rounds. What’s more, for some YC founders, raising massive amounts of capital from prestigious VC firms is no longer the main goal. “It’s a different conversation now than when founders would aim to have Sequoia and Benchmark lead their Series A,” Rohan explained.

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Source: techcrunch‍