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Gumroad’s Sahil Lavingia broke into the venture capital world as one of the first testers of the rolling fund, an AngelList product that allows investors to raise capital on a subscription basis. That was 2020. Fast forward to 2022 and a lot has changed.
One of these changes? The number of pitches from founders looking to increase. “Since March, it’s down about 90%,” Lavingia told TechCrunch. “I was probably seeing more than most – around 20-40 well-controlled decks per week – and that number has dropped to around two-four per week now.” He’s also seen the quality of talent rise for people wanting to work for Gumroad — which he attributes in part to the constant rush of layoffs — and a decline in founders starting companies.
A drop in the number of founders raising capital suggests early-stage startups aren’t as immune to macro shifts as some investors claim; in contrast, a boom in new startups would support the idea that recessions — and the accompanying wave of layoffs — are when startups are born.
Lavingia breaks down the status of founders into three buckets: “tourist founders, immigrant founders, and ‘born and bred’ founders.” Tourist founders, he said, are those who only start businesses in bull markets, a cohort he says has fallen by around 100%.
“They are rarely fundable in bear markets,” Lavingia said. “They need to hire others to build stuff.” Immigrant founders, on the other hand, care less about the reputation and status of starting a business, but weigh its risk and return. That founding cohort has been cut in half, according to Lavingia. Finally, “born and raise” founders are founders regardless of the market: “They all existed and therefore raised money in 2020-2021, so they too do not create companies and do not raise money at the same rate.
There are two sides that form in early-stage venture capital: investors who admit that talent has changed, and those who keep deal flow as strong as ever.
If you want to read my full take, check out my TechCrunch+ column, “Investors brace for founder downturn. Or influx. Wait what?”
In the rest of this newsletter, we’ll talk about Y Combinator on its small class size and early 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 reduces the size of its class
Y Combinator says it has intentionally reduced the number of startups within 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 in 414 companies.
Here’s why it’s important: Over the years, Y Combinator’s ever-increasing batch sizes have become a common, if not cliché, conversation among techies. I know this because we contribute a lot to this conversation (especially on equity). The biggest issue people have had with YC’s growing class size is that it threatens one of the accelerator’s biggest value propositions: the network. The bigger the class, the harder it is to stand out.
While YC says it hasn’t been cut due to criticism or the cost of its growing check sizes, this move will certainly help those in the current cohort stand out, simply due to the lack of competition.
Rookie fund managers have ideas
TechCrunch+ Rebecca Szkutak led the latest investor survey, which gets a temperature check of seven fund managers for the first time finding themselves at the start of a downturn. What advantages do entry-level VCs have over more experienced competitors in a tough 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 live piece on the site.
Here’s what’s important: There’s always a silver lining, but especially so if you have a smaller wallet. Szkutak gives us a teaser clip below:
“We don’t carry any of the baggage that may come from having previous funds or having a lot of capital tied up in what seem to be very expensive vintages,” Stuto said. “Much like a founder, who looks at the world differently than subject matter experts, we (new managers) bring fresh eyes to how certain issues and industries develop.”
Lily Szkutak’s investigationand she further analysis of iton the site.
If you missed last week’s newsletter
Read it here: “Bootstraps are coming, bootstraps are coming.” I also recorded a companion podcast with my favorite colleague, Alex, which you can listen to here: “Is it time for the bootstrapper to jump on the adventure treadmill?”
Do you have any requests for topics to dig into, either on Startups Weekly or on the show? Tweet me a great question and I’m going to tackle it, either in an upcoming Startups Weekly or on Equity.
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And it’s a wrap. I go to the edge of the lake to take advantage of these last summer weekends. Take care of yourself!