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8 VCs say they are still bullish on SAFE rounds, but it’s not 2021 anymore

SAFE rounds, or simple agreements for future equity, have been around since Y Combinator invented them a decade ago. But they took on a different role in 2021 when they became a fast-moving tool that helped startups close deals in mere days. Before that they were used to close really early rounds or were used between financings.

But the market looks very different now. Valuations have started to level out, and deals have slowed down. The power dynamics seem to be swinging back toward investors and out of the founder-friendly market we’ve been in for the last few years.

Investors are still seeing the value in the SAFE structure, though. TechCrunch+ spoke to seven firms about this deal format, and they all said they still thought it was largely the best option for early-stage rounds — but VCs have boundaries and would always prefer a priced round.

Earnest Sweat, the founding partner at Public School Ventures Syndicate, said he thinks SAFEs can still be a great option for people looking to raise early-stage capital — especially for those who didn’t raise at crazy valuations in 2021. But for others, Sweat said he’s not sure it makes sense anymore. “The question for established companies that are raising bridge rounds that are notes is: What is this funding bridging to, and why can’t the company raise a priced round?”

Other investors echoed this as well. Greg Smithies, a partner at Fifth Wall, said that SAFE notes can be a great option at pre-seed and seed stages, but he also said that his firm encourages founders to do a priced round instead. Companies that are using this format to avoid a down round should stop avoiding the inevitable.

“The valuations of 2021 are never coming back, and it would be disingenuous to yourself and to your limited partners (investors) to pretend that they are,” Smithies said. “So, just take the down round. Reset the valuation to the new reality that we’re currently in.”

Investors also expressed their thoughts around SAFEs without valuation caps, raising these kinds of rounds beyond the seed stage, and how they can be more investor friendly.

Who we spoke to:

Earnest Sweat, founding partner, Public School Ventures Syndicate

How have the questions you’ve received from current and prospective portfolio companies around raising SAFEs changed in the last two years?

Today’s startups (current and prospective) are looking at the market more reasonably. Most valuations are more aligned with lower multiples than we saw at the peak in 2020 and 2021. I’m seeing SAFE notes as a favorable option for pre-seed or seed companies that didn’t raise capital in the peak 2021 market or that raised at a relatively conservative valuation during that time.

I’m still seeing convertible notes getting done in this environment but it’s more favorable to newer/earlier companies rather than those in the growth stage. The question for established companies that are raising bridge rounds that are notes, is what is this funding bridging to and why can’t the company raise a priced round?

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Level up with our partners at TC Early Stage by Lauren Simonds originally published on TechCrunch

Lux Capital ditches its opportunity fund in latest fundraise

Lux Capital, known for investing in life science and frontier tech startups, is back in the market to fundraise for its latest vehicle — but this time without a dedicated late-stage entity.

The firm is targeting over $1 billion for Lux Ventures VIII, according to meeting materials from the New Mexico State Investment Council (NM SIC) for March 28, which committed $62.5 million to the fund. The fund will combine the firm’s early and late-stage investing strategies into one pool.

The firm was founded in 2000 and has raised $4 billion across nine previous funds. Lux declined to comment on its fundraising efforts.

The fund will still invest in later-stage opportunities, but the firm’s founder and managing partner, Josh Wolfe, told the NM SIC that the fund will primarily invest at the early stage, and will continue the firm’s thesis of investing at the intersection of sciences and tech.

The firm most recently raised a pair of funds in June 2021 that totaled nearly $1.5 billion. This included $675 million for early-stage focused Lux Ventures VII, and $800 million for Lux Total Opportunities Fund, a late-stage fund.

Lux is the latest firm with early-stage roots to ditch a dedicated late-stage fund given that the late-stage and exit environments have remained muted over the past year. Last month, Y Combinator said it would shut down its continuity fund, pulling back from late-stage investing and letting go of 20% of its team in one move.

Multiple firms, including Founders Fund and Vibe Capital, have either shrunk the size of their funds or given investors some of their capital back due to the softening market.

As 2023 rolls on, we expect to see more funds retreat to their traditional investing stage.

Lux Capital ditches its opportunity fund in latest fundraise by Rebecca Szkutak originally published on TechCrunch

Sweden’s EQT Ventures closes a its third fund at €1.1B to double down on European and early-stage startups

Startups might be in a funding midwinter, but the ray of sun shining on some VCs speaks of a different trend. EQT Ventures, the venture fund arm of Sweden’s investment giant EQT making early-stage bets on startups primarily in Europe, has closed its latest fund and filled its coffers with 1 billion euros (and $1.1 billion in total commitments).

This brings the total raised by EQT to €2.3 billion since the EQT Ventures launched in 2016. To date, the firm has backed some 100 companies, with 18 exits and nine “unicorns” (Wolt, Small Giant Games, Einride, Handshake, Netlify and Instabox/Instabee are in that group). This third fund fund was raised and closed relatively quickly, between February and June of this year (with final paperwork coming in since then), and there have been some 13 investments made out of it so far, Juni, Nothing, Knoetic and Candela among them.

The larger EQT has emerged as one of the key deal makers in recent months where larger privately-held companies have been looking for funding and/or exit opportunities. These have included the recent purchase of New Jersey-based Billtrust for $1.7 billion and leading an investment round for Knoetic.

But it has also put money where its mouth is, so to speak. Earlier this year sister subsidiary EQT Growth announced a $2.4 billion fund largely aimed at scaling startups out of Europe. Growth has backed the likes of Vinted, Epidemic Sound and Mambu.

The plan will be to use this latest EQT Venture fund for similar geographical ends: the firm wants to use it to make investments of between $1 million and $50 million, with about two-thirds of all investments falling in Europe, and the rest across the U.K. and the U.S., said Lars Jörnow, a partner at the firm.

In terms of categories, EQT Ventures will remain generalist but ideally is on the lookout for startups that address “where society has problems,” Jörnow said. That includes greentech investments, transportation and the future of work, he said (specifically areas like tools and platforms for freelancers).

The firm’s close of the fund speaks to what appears to be a bifurcation in the world of tech investing. While funds and firms that focus on much larger and later stage companies might be seeing big losses in their portfolios, there remains confidence among those that back the funds, the limited partners, that investors focusing on earlier (and smaller) stages still have a lot of opportunity ahead. “The higher the valuation before the contraction, the bigger the fall,” he warned.

It helps too to have a history of good bets. Jörnow noted that the company’s target had actually been €900 million. His takeaway of the relatively quick close and exceeding that figure:

“Investors think it’s a great idea to back VCs that are investing in early stage with a much longer holding period,” he said. On average, EQT expects exits to be made in 2031, “when the world will look different than today,” he added. “If you back the best founders, they will grow startups regardless of the current macro climate.”

Sweden’s EQT Ventures closes a its third fund at €1.1B to double down on European and early-stage startups by Ingrid Lunden originally published on TechCrunch

Stanford moonshot promises near-term profitability with no-code magical mushrooms, ft. Plaid of X

Hello and welcome back to Equity, a podcast about the business of startups, where we unpack the numbers and nuance behind the headlines. As you can tell by the headline of this episode, this is a bonus episode all about Y Combinator Demo Day (and the terms we heard most often during the two-day affair).

Natasha and Alex jumped on Twitter Spaces to talk through our favorites of the batch, geography changes, and diversity shake-up that included less women getting funded batch over batch. Below are some of the posts we pulled from:

Y Combinator week is busy, but we made it through! Talk Monday!

Equity drops every Monday at 7 a.m. PDT and Wednesday and Friday at 6 a.m. PDT, so subscribe to us on Apple Podcasts, Overcast, Spotify and all the casts.

Stanford moonshot promises near-term profitability with no-code magical mushrooms, ft. Plaid of X by Natasha Mascarenhas originally published on TechCrunch

Our 10 favorite startups from YC’s S22 Demo Day: Part 2

And we’re back! Yes, today was the second day of pitches from Y Combinator, a U.S. startup accelerator with global outreach that conducts demo days twice a year. This year’s Summer 2022 cohort gave us hundreds of batch companies to consider. For participating founders, it’s a critical day; for investors, it’s a buffet; for us in the media, it’s a chance to look at lots of companies, each hoping to be the next hit from the well-known startup backer.

TechCrunch has coverage on discrete areas of startup work that were represented, including geographic breakdowns, a dive into AI startups and a look into fintech’s future. But here, we’re detailing a few startups from the batch that caught our eye.

As always, this list is for fun, in no particular order — just startups that stood out to TechCrunch reporters for one reason or another. You can find all of our coverage here and our favorites from the first day here. An entire list of all startups in the batch, provided by YC, is here as well.

Our 10 favorite startups from YC’s S22 Demo Day: Part 2 by Kyle Wiggers originally published on TechCrunch

The biggest moonshots in YC’s S22 batch

Do bigger checks lead to bigger swings? Y Combinator’s latest participants are the second batch to land a $500,00 check as part of the accelerator’s recently refreshed standard deal. And while the accelerator says it only looks at founders when investing in startups, not sector, category or idea, more money in the pipeline may be empowering enough to attract a different cohort of founders.

With this in mind, this year’s batch provides a glimpse on what a cohort of YC-approved founders are prioritizing amid a downturn, pandemic, high inflation and ongoing war. The results are diverse — and we’ve already seen ways it’s impacting the future of fintech, crypto and artificial intelligence.

Below, TechCrunch decided to draw out the biggest moonshots of the batch, with the above factors in mind. Because we don’t all bet our potential legacies on faux fish during a looming recession. Without further ado, let’s get into who made the cut.

Beyond Beyond Meat: Numi’s faux fish

Brands like Beyond Meat and Impossible have shown there’s demand for fake meat that “bleeds,” but are hordes of fish-eaters prepared to dine on imitation crustaceans?

The plant-based seafood industry is teeny compared to the global seafood business today, but demand is on the rise as brands explore a range of ingredients to see what sticks — like tomato for tuna (Ocean Hugger) and konjac for scallops (The Plant Based Seafood Co). Joining the fray is Numi, a YC-backed startup that’s using a “combination of soy, pea and lentil protein” and “precision fermentation” to prepare something resembling shellfish.

Numi’s products are still in development, but the company is already boasting about a moonshot-sized goal — to capture 30% of the seafood market in 10 years. That’s a whole lot of potential mouths to feed; seafood consumption is poised to nearly double by 2050, per researchers at Stanford. But in light of the industry’s many environmental ills, including overfishing, trash, emissions and waste, it sure seems like a new wave of convincing faux fish companies would do some good.

Harri Weber

Solving optimization problems with bespoke hardware

Optimization problems are the bane of many companies’ existences. For example, shipping and logistics providers have to figure out on a daily basis which products can ship in which containers — and indeed, how many containers they need in the first place. According to one source, 85% of Fortune 500 companies use mathematical optimization in their operations.

Enter Integrated Reasoning, a startup that claims to be developing hardware for solving these sorts of problems in the cloud. Founded by longtime engineers, there’s little that’s been made public about the company’s plans. But the co-founders did reveal during Demo Day that they have an initial product targeting the knapsack problem, an optimization problem where, given a set of items — each with a weight and value — one must determine the number of items to include in a collection so that the total weight is less than or equal to a given limit and the total value is as large as possible.

Optimization problems might sound like an odd market around which to build a company. But there’s clearly a customer base, and Integrated Reasoning is promising the moon. The company claims its hardware could make it up to 100x faster and 10x cheaper to solve problems like scheduling airline pilots or packing shipping containers, which — if accurate — might just enable Integrated Reasoning to make a splash in lucrative industries.

Kyle Wiggers

Flying for dummies

Learning to fly is a common bucket list item, but it is costly, time-consuming and difficult. This causes a large number of student pilots to drop out of training before they reach their dreams. And sadly, some of those who do get their license will end up having fatal accidents due to mistakes of theirs.

Airhart Aeronautics is working on building airplanes that are easier and safer to fly, thanks to semi-autonomous flight control systems that don’t require “stick and rudder mastery.” It’s too early to tell when Airhart will reach product-market fit, but its proposal to “make flying to Tahoe as easy as driving to the grocery store” did sound like a strong audience fit for YC’s Demo Day.

It may seem late to build airplanes anyone can fly when other startups are focusing on airplanes nobody has to fly. Companies working on delivering autonomous aircraft include Merlin Labs, Pyka, Reliable Robotics, Volocopter and Xwing, some of which are already far along in their journey. But we are still calling Airhart a moonshot, because semi-autonomy does seem to have better odds of landing on time than full autonomy, especially for private flying.

Anna Heim

I’d like to buy 10% of your future earnings, please

It’s hard to be an athlete, and finding enough time and resources to become a professional athlete takes time and cash dollars. Moonshot is letting angel investors invest in the futures of athletes, in exchange for a share in their future prize money. It’s kind of similar to what Trendex is doing (although Trendex lets you invest in all sorts of talent — including musicians).

So why is this a moonshot? Part of me can see this as the future; if you are a promising athlete, getting an early injection of cash could make or break your career, and I recognize that for some folks, this may be the only way to make their dreams come true.

Another part of me just can’t get over how fantastically bleak it is to essentially enable people to sell a part of their future net worth to investors. I know we are living in late-stage capitalism, but however I turn this, I can’t make this concept feel like anything but rent-seeking. I’m sure the founders didn’t specifically design their companies to make an unequal world even less equitable, but we’re one or two market cycles away from this getting truly grim.

Haje Kamps

Let’s try this DTC healthcare thing again, but better this time

The direct-to-consumer healthcare space was hot, then not, as sector unicorns have scaled back ambitions upon hitting growth pains. That’s why I was surprised, then impressed to see Almond take the stage at Y Combinator Demo Day this week. Almond is a healthcare platform that is trying to make ObGyn care faster through in-person and telehealth services.

“We’re rebuilding back-office tech that saves physicians time, and we’re hiring a wider range of care providers roles, which let us deliver better outcomes to patients and reduce the amount of time it takes to get their issue resolved,” the company said via Y Combinator’s website. Membership for Almond is an annual $250 fee, similar to a OneMedical-type business model, and founding members get the first year for $150. Any visits and lab charges are billed to insurance.

The co-founders have a balance in backgrounds. Carly Allen, co-founder and chief brand officer, has been head of production for campaigns that help brands like Coca-Cola, Nike, Chipotle and Bonobos, while Tara Raffi, co-founder and CEO, has startup chops through building McKinsey’s internal tech incubator and consulting with large U.S. hospital systems. As we know from struggles faced at Ro, Hims and other platforms, the DTC healthcare space needs a good balance of smart, accessible branding and efficacy, so let’s see how Almond executes.

Natasha Mascarenhas 

Future flight, fuck yeah

For my moonshot selection I want to highlight a few companies from the recent batch that have wings, and want to shake up moving stuff around.

When Boom came around, I figured it was a cool idea that would go precisely nowhere. But, to my incredibly excited chagrin, the company is still in business and has raised buckets of money. Perhaps there is a venture market for the future of flight.

Velontra wants to build a “hypersonic space plane,” which is a good idea. There’s less friction that high up, and you can zip around pretty quick without air holding you back. Velontra, sweetening the deal, wants its planes to be able to “takeoff from anywhere in any weather.” Excellent and perfect, no notes.

Seaflight Technologies is doing the opposite. Instead of wanting to fly very high and very fast, it wants to fly lower and slower. The company is building electric “autonomous wingships” that fly very close to the ground. Per its pitch, if I understood the regulatory nuance, being so close to the ground clears the air — ha! — when it comes to government oversight.

Naturally these companies will each require lots of capital, and have real tech risk to their makeup. But that’s what makes them good — you can’t shake up flight without a bucket of money and a big vision. And while the 737 is great, and I will always be fond of it for shuttling me around my home country for so very long, and so very far, I am ready for something faster and higher. And for my delivered goods, the inverse.

Alex Wilhelm

Honorable mentions

  • Ult, which describes itself as an “Uber for gamers” startup. The startup charges users to get them matched with fun (or challenging) competitors. Also, it has a great website.
  • Drip, which describes itself as a “BNPL for Brazil.” The BNPL space is difficult for a variety of reasons, and to still be disrupting in the category — despite public market rumblings — is impressive. “While Affirm is creating the habit in the US, Brazilians already split in installments 30% of their retail payments,” the company said via Y Combinator’s website. “With Drip, they now split payments without eating into their credit card limits and earn better rewards.”
  • Coverage Cat, because it’s a damn cute name and a damn difficult category to build in. But, selfishly, sign us up for consumer optimized insurance!

The biggest moonshots in YC’s S22 batch by Natasha Mascarenhas originally published on TechCrunch

Where is Y Combinator startup-hunting in 2022?

Like the startup ecosystem itself, accelerators change with time. Techstars has expanded to a network of programs, to pick one example. Y Combinator, perhaps the best-known startup accelerator, has also evolved. It now offers more capital to chosen companies than ever and is in the process of working out how its program will operate in a post-COVID world.

Like much of the venture capital landscape, Y Combinator has shrunk slightly this year. The current cohort of startups in the U.S. program is around 40% slimmer, featuring only 240 companies compared to the preceding batch’s 400.

That change had us curious about the second-order effects of admitting fewer companies into the program: What would a smaller batch do to the geographic makeup of the companies at the accelerator?

Before we dive into the data, a caveat concerning remote work: Per the accelerator, more than one-third (35%) of startups in its present program are remote, and even more (37%) are what it calls “remote-friendly.” Remote work and partially remote teams dilute the importance of where a company is “based.”

This is not a new trend. COVID led to a host of startups being born in a remote-first world, meaning that the hiring in the last few years has often been distributed. Never has it meant less to be based in, say, the United States, if your team is spread across countries and time zones. Still, where a company is domiciled still means something and tells us where companies are basing themselves to best collect talent, capital and exit possibilities.

There’s only one Colombian startup in the current batch, which takes things back to pre-COVID levels.

Let’s see where Y Combinator’s most promising young tech companies come from to get a loose barometer of where the accelerator is finding the most intriguing founders to back.

Global overview

Given its smaller size, the fact that this year’s Y Combinator group represents fewer countries is not a surprise. Per the investing group, the Summer 2022 class has startups from 34 countries, down from the 42 countries in the Winter 2022 cohort.

Notably, that decrease is only slightly less than 20%, which is about half the 40% drop in the total number of startups accepted into the program, as we mentioned above. It appears geographic diversity in terms of the countries represented did not decrease linearly with the reduction in batch size.

Its diversity may not have shrunk as much as some might expect, but this cohort is still more centered on the United States than before. Per the company, about 58% of its present batch are based in the United States, up from 50% in the Winter 2022 cohort.

Where is Y Combinator startup-hunting in 2022? by Anna Heim originally published on TechCrunch

Our 11 favorite companies from YC’s S22 Demo Day: Part 1

Y Combinator is back, this time with a slightly smaller batch of startups. Still, the massive accelerator has two days’ worth of upstart tech companies to show off. TechCrunch is tuned in, as always, and in keeping with our historical coverage, we compiled a list of our favorites from the first day’s pitches.

For more on Y Combinator’s latest batch, TechCrunch examined the cohort’s diversity makeup, looked into fintech bets from the group and examined what’s going on in seed-stage crypto.

These are startups that stood out to us for one reason or another. They aren’t endorsements and sometimes are just for fun. The idea is that you might not have time to sit through over 100 pitches — so let us filter a bit and highlight some of the best companies from the first day of Y Combinator’s Summer 2022 Demo Day.

We’ve tagged each selection with the TechCrunch author who picked it and provided a link to the company, along with notes on what it does — and why we think it’s cool. Let’s have some fun!

Our 11 favorite companies from YC’s S22 Demo Day: Part 1 by Anna Heim originally published on TechCrunch