In 2024, many Y Combinator startups only want tiny seed rounds — but there’s a catch

What this trend tells us about YC startups

The trend toward smaller rounds shows that YC’s current batches of founders have become more realistic toward current market conditions. But they are also expecting that the YC badge will be enough for institutional seed VCs to either ignore their fund’s ownership requirements or be willing to pay over market value to invest in their young startups.

Many of these startups will find that being a YC-backed company just isn’t enough to override a VC’s investment requirements. And while going through the accelerator program definitely does give these companies a level of prowess compared to startups of the same age that haven’t, many VCs just aren’t as interested in YC companies as they once were.

From the heady days when YC cohorts grew to more than 400 companies, the accelerator isn’t considered as selective as it once was by many VCs — even though it has shrunk its cohort size in recent years. And its startups are also thought to be too expensive.

Investors are expressing concerns over the high valuations of companies on platforms like LinkedIn and Twitter. A survey by DailyTech revealed that venture capitalists who had previously invested were now refraining from doing so due to the steep entry prices for these companies.

Some companies themselves are noticing a shift in the funding landscape. A founder from Y Combinator (YC) mentioned that their startup opted for a more traditional seed round as they were further along in their journey when they joined YC. However, many others are seeking smaller rounds as they are unsure about securing larger investments at their current stage, making the issue of higher valuations even more intriguing.

The trend of raising smaller seed rounds is not entirely negative. It allows startups to grow before pursuing a larger seed round, potentially avoiding the pitfalls of overvaluation in subsequent funding rounds. However, there are risks involved, such as undercapitalization if companies label these smaller rounds as seed rounds with the aim of raising a Series A in the future.

Amy Cheetham from Costanoa Ventures highlighted the potential challenges faced by startups that raise small seed rounds without institutional backing. Without a lead investor, accessing additional funding between seed and Series A rounds can be difficult, impacting the company’s growth trajectory.

Despite these concerns, YC’s president, Garry Tan, believes that the key to success lies in creating a product that resonates with customers, rather than solely relying on investors. However, the shift towards smaller seed rounds may impact seed investors’ interest in YC companies, potentially leading to a reevaluation of investment strategies.

In the long run, this shift could benefit the ecosystem by directing investor focus towards lead Series A deals, where pricing may be more favorable. Cheetham expressed optimism about returning to lead Series A deals in the future, suggesting that the current challenges in seed investing could pave the way for more strategic investments down the line.