To fund Y Combinator’s top startups, VCs scoop them before Demo Day

Hundreds gathered this week at San Francisco’s Pier 48 to see the more than 200 companies in Y Combinator’s Winter 2019 cohort present their two-minute pitches. The audience of venture capitalists, who collectively 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 fact, some YC graduates skip out on their stage opportunity altogether. Why? Because they’ve already raised capital or are in the final stages of closing a deal.

ZeroDown, Overview.AI and Catch are among 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 upwards of $10 million at a $75 million valuation, sources tell TechCrunch. ZeroDown hasn’t responded to requests for comment, nor has its rumored lead investor: Goodwater Capital.

Without requiring a down payment, ZeroDown purchases homes outright for customers and helps them work toward ownership with monthly payments determined by their income. The business 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 significant buzz ahead of Demo Day. Sources tell TechCrunch the startup had actually raised a small seed round ahead of YC from former YC president Sam Altman, who recently stepped down from the role to focus on OpenAI, an AI research organization. Altman is said to have encouraged ZeroDown to complete the respected Silicon Valley accelerator program, which, if nothing else, grants its companies 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 round, though sources confirm it skipped Demo Day because of a deal.

Catch, for its part, closed a $5.1 million seed round co-led by Khosla Ventures, NYCA Partners and Steve Jang prior to Demo Day. Instead of pitching their health insurance platform at the big event, Catch published a blog post announcing its first feature, The Catch Health Explorer.

“This is only the first glimpse of what we’re building this year,” Catch wrote in the blog post. “In a few months, we’ll be bringing end-to-end health insurance enrollment for individual plans into Catch to provide the best health insurance enrollment experience in the country.”

TechCrunch has more details on the healthtech startup’s funding, which included participation from Kleiner Perkins, the Urban Innovation Fund and the Graduate Fund.

Four more startups, Truora, Middesk, Glide and FlockJay had deals in the final stages when they walked onto the Demo Day stage, deciding to make their pitches rather than skip the big finale. Sources tell TechCrunch that renowned venture capital firm Accel invested in both Truora and Middesk, among other YC W19 graduates. Truora offers fast, 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.

Finally, Glide, which allows users to quickly and easily create well-designed mobile apps from Google Sheets pages, landed support from First Round Capital, and FlockJay, the operator an online sales academy that teaches job seekers from underrepresented backgrounds the skills and training they need to pursue a career in tech sales, 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, thanks to the invaluable YC network, increase their chances at raising, as well as their valuation, 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 that can result in pre-Demo Day acquisitions.

This year, Elph, a blockchain infrastructure startup, was bought by Brex, a buzzworthy fintech unicorn that itself graduated from YC only two years ago. The deal closed just one week before Demo Day. Brex’s head of engineering, Cosmin Nicolaescu, tells TechCrunch 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 before batch day because that opens the floodgates,” Nicolaescu told TechCrunch. “The reason why I really liked them is they are very entrepreneurial, which aligns with what we want to do. Each of our products is really like its own business.”

Of course, Brex offers 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 to Brex, helping the $1.1 billion company build its next product, a credit card for large enterprises. Brex declined to disclose the terms of its acquisition.

Hunting for the best deals

Y Combinator partners Michael Seibel and Dalton Caldwell, and moderator Josh Constine, speak onstage during TechCrunch Disrupt SF 2018. (Photo by Kimberly White/Getty Images)

Ultimately, it’s up to startups to determine the cost at which they’ll give up equity. YC companies raise capital under the SAFE model, or a simple agreement for future equity, a form 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 deal. 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 plan. The businesses that raise at valuations north of $10 million, he explained, do so because of high demand.

“Each company decides on the amount of money they want to raise, the valuation they want to raise at, and when they want to start fundraising,” Seibel told TechCrunch via email. “YC is only an advisor and does not dictate how our companies operate. The vast majority of companies complete fundraising in the 1 to 2 months after Demo Day. According to our data, there is little correlation between the companies who are most in demand on Demo Day and ones who go on to become extremely successful. Our advice to founders is not to over optimize the fundraising process.”

Though Seibel says the majority raise in the months following Demo Day, it seems the very 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, partner Kristina Simmons tells TechCrunch, even scheduling interviews with companies in the period between when a startup is accepted to YC to before they actually begin the program. Another Khosla partner, Evan Moore, echoed Seibel’s statement, claiming there isn’t a correlation between the future unicorns and those that raise capital ahead of Demo Day. Moore is a co-founder of DoorDash, a YC graduate now worth $7.1 billion. DoorDash closed its first round of capital in the weeks following Demo Day.

“I think a lot of the activity before demo day is driven by investor FOMO,” Moore wrote in an email to TechCrunch. “I’ve had investors ask me how to get into a company without even knowing 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 what many investors are used to, so every batch some complain 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 economy.”

This year, given the number of recent changes at YC — namely the size of its latest batch — there was added pressure on the accelerator to showcase its best group yet. And while some did tell TechCrunch they were especially impressed with the lineup, others indeed 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 valuation in 2018. According to PitchBook, U.S. startups raised seed rounds at a median post-valuation of $10 million last year; so far this year, companies are raising seed rounds at a slightly higher post-valuation of $11 million. With that said, many of the startups in YC’s cohorts are not as mature as the average seed-stage company. Per PitchBook, a company can be several years of age before it secures its seed round.

Nonetheless, pricey deals can come as a disappointment to the seed investors who find themselves at YC every year but because their reputations aren’t as lofty as say, Accel, aren’t able to book pre-Demo Day meetings with YC’s top of class.

The question is who is Y Combinator serving? And the answer is founders, not investors. YC is under no obligation to serve up deals of a certain 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, advise their startups to charge the best investors the going rate?

Taxes on VC and electric buses harming oil prices

From Extra Crunch

  • A lot of subscribers got to hear from TechCrunch hardware guru Brian Heater, who has been meeting with (too many) robotics companies as we prepare for TechCrunch Sessions: Robotics. If you weren’t able to join us, a transcript will be available in the next 48 hours.
  • We have Lucas Matney and Eric Peckham on the horn this Friday at noon PDT to talk about all things Game Developers Conference (GDC). Be sure to check your emails for details.

Wide Angle

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Stories from outside the 280/101 corridor

  • Indian entrepreneurs are furious over a tax on venture investing, in which the government taxes the proceeds of an equity round.

What latency feels like on Google’s Stadia cloud gaming platform

After peppering Google employees with questions regarding Stadia’s latency, pricing and supported devices to mostly no avail, I got my hands on one of their new controllers and pressed play on the Doom Eternal gameplay they were showing off on a big-screen TV.

Things started off pretty ugly. The frame rate dropped to a fast-paced PowerPoint presentation, the resolution dipped between 4K crispness and indecipherable blurriness and latency seemed to be as much as a half-second. As the Google employees looked nervously at each other, someone grabbed the controller from me and restarted the system.

After a system restart, things moved along much, much more smoothly. But what the situation sums up is that when it comes to game-streaming, things can be unpredictable. To give Google credit, they stress-tested their system by running Stadia on hotel WiFi rather than taking me down to Mountain View and letting me play with Stadia under much more controlled conditions.

Stadia is Google’s cloud game-streaming service and while there’s a lot we don’t know the basic tenants are clear. It moves console-level gaming online into your Chrome browser and lets you access it from devices like smartphones that wouldn’t be able to handle the GPU-load initially.

Despite the initial hiccup, my experience with Stadia was largely positive. Doom Eternal was in crisp 4K and I was able to focus on the game without thinking about the service I was playing it on, which is ultimately the best endorsement of a new platform like this.

This will likely be a great service for more casual gamers but might not be the best fit for the most hardcore users playing multi-player titles. While you may be launching this service directly from YouTube feeds of eSports gamers, this is something they probably wouldn’t use. That’s because the latency between input and something being displayed onscreen isn’t imperceptible, though it’s probably good enough for the vast majority of users (myself included) which is still a worthy prize for the company’s efforts to take on the massive gaming market.

Google Stadia VP Phil Harrison wouldn’t give me a proper range of where exactly latency fell, but he did say it was less than the time it took for a human to perceive something and react — which another Google employee then told me differed person-to-person but was generally 70ms-130ms — so I suppose the most official number we’ll get is that the latency is probably somewhere less than 70ms.

There is no hard truth here though because latency will really depend on your geographic proximity to the datacenter. Being in San Francisco, I connected to a data center roughly 50 miles away in San Jose. Google confirmed to me that not all rural users in supported countries will be able to sign-up for the service at launch because of this.

Other interesting things to note:

  • Google said they’d confirm devices later, but when asked about iOS support at launch they highlighted that they were focused on Pixel devices at launch.
  • It doesn’t sound like you’ll be able to restore purchases of games you’ve previously gotten, you’ll unsurprisingly have to buy all of your Stadia titles on the platform.
  • You’ll be able to access games from YouTube streams, but there will also be an online hub for all your content and you can access games via links.
  • The controller was nice and probably felt most similar to the design of Sony’s DualShock controller.

We’ll probably be hearing a lot more at Google I/O this summer, but with my first hands-on demo, the service certainly works and it certainly feels console-quality. The big freaking question is how Google prices this, because that pricing is going to determine whether it’s a service for casual gamers or hardcore gamers, and that will determine whether it’s a success.

“Energizing Times”: Microsoft to “go big” at E3 in response to Google Stadia

Sea of Thieves streaming to a smartphone with an attached Xbox One controller.

Microsoft announced its Xcloud game-streaming service last August, with the ambition of streaming console-quality games to gamers wherever they are—on their tablets, smartphones, PCs or even consoles. Yesterday, Google joined the streaming gaming fray with its announcement of Google Stadia, one-upping Redmond by offering the assembled press limited hands-on access to Stadia games.

Google promises that Stadia will be “coming 2019,” potentially stealing a march on Xcloud, which is due only to enter public trials this year. But in an internal email sent to rally the troops, Phil Spencer, Microsoft’s gaming chief, seemed unsurprised and apparently unconcerned.

Spencer wrote that Google “went big” with its Stadia announcement, but Microsoft will have its chance to do that, too: he promised that the company will “go big” with its E3 presentation and raft of announcements. He also said that Google’s launch endorsed Microsoft’s decision to launch its streaming service and said that Microsoft offered all the key elements Google identified—”Content, Community, and Cloud”—but that ultimately, “it’s all about execution.”

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Ahead of third antitrust ruling, Google announces fresh tweaks to Android in Europe

Google is widely expected to be handed a third antitrust fine in Europe this week, with reports suggesting the European Commission’s decision in its long-running investigation of AdSense could land later today.

Right on cue the search giant has PRed another Android product tweak — which it bills as “supporting choice and competition in Europe”.

In the coming months Google says it will start prompting users of existing and new Android devices in Europe to ask which browser and search apps they would like to use.

This follows licensing changes for Android in Europe which Google announced last fall, following the Commission’s $5BN antitrust fine for anti-competitive behavior related to how it operates the dominant smartphone OS.

tl;dr competition regulation can shift policy and product.

Albeit, the devil will be in the detail of Google’s self-imposed ‘remedy’ for Android browser and search apps.

Which means how exactly the user is prompted will be key — given tech giants are well-versed in the manipulative arts of dark pattern design, enabling them to create ‘consent’ flows that deliver their desired outcome.

A ‘choice’ designed in such a way — based on wording, button/text size and color, timing of prompt and so on — to promote Google’s preferred browser and search app choice by subtly encouraging Android users to stick with its default apps may not actually end up being much of a ‘choice’.

According to Reuters the prompt will surface to Android users via the Play Store. (Though the version of Google’s blog post we read did not include that detail.)

Using the Play Store for the prompt would require an Android device to have Google’s app store pre-loaded — and licensing tweaks made to the OS in Europe last year were supposedly intended to enable OEMs to choose to unbundle Google apps from Android forks. Ergo making only the Play Store the route for enabling choice would be rather contradictory. (As well as spotlighting Google’s continued grip on Android.)

Add to that Google has the advantage of massive brand dominance here, thanks to its kingpin position in search, browsers and smartphone platforms.

So again the consumer decision is weighted in its favor. Or, to put it another way: ‘This is Google; it can afford to offer a ‘choice’.’

In its blog post getting out ahead of the Commission’s looming AdSense ruling, Google’s SVP of global affairs, Kent Walker, writes that the company has been “listening carefully to the feedback we’re getting” vis-a-vis competition.

Though the search giant is actually appealing both antitrust decisions. (The other being a $2.7BN fine it got slapped with two years ago for promoting its own shopping comparison service and demoting rivals’.)

“After the Commission’s July 2018 decision, we changed the licensing model for the Google apps we build for use on Android phones, creating new, separate licenses for Google Play, the Google Chrome browser, and for Google Search,” Walker continues. “In doing so, we maintained the freedom for phone makers to install any alternative app alongside a Google app.”

Other opinions are available on those changes too.

Such as French pro-privacy Google search rival Qwant, which last year told us how those licensing changes still make it essentially impossible for smartphone makers to profit off of devices that don’t bake in Google apps by default. (More recently Qwant’s founder condensed the situation to “it’s a joke“.)

Qwant and another European startup Jolla, which leads development of an Android alternative smartphone platform called Sailfish — and is also a competition complainant against Google in Europe — want regulators to step in and do more.

The Commission has said it is closely monitoring changes made by Google to determine whether or not the company has complied with its orders to stop anti-competitive behavior.

So the jury is still out on whether any of its tweaks sum to compliance. (Google says so but that’s as you’d expect — and certainly doesn’t mean the Commission will agree.)

In its Android decision last summer the Commission judged that Google’s practices harmed competition and “further innovation” in the wider mobile space, i.e. beyond Internet search — because it prevented other mobile browsers from competing effectively with its pre-installed Chrome browser.

So browser choice is a key component here. And ‘effective competition’ is the bar Google’s homebrew ‘remedies’ will have to meet.

Still, the company will be hoping its latest Android tweaks steer off further Commission antitrust action. Or at least generate more fuzz and fuel for its long-game legal appeal.

Current EU competition commissioner, Margrethe Vestager, has flagged for years that the division is also fielding complaints about other Google products, including travel search, image search and maps. Which suggests Google could face fresh antitrust investigations in future, even as the last of the first batch is about to wrap up.

The FT reports that Android users in the European economic area last week started seeing links to rival websites appearing above Google’s answer box for searches for products, jobs or businesses — with the rival links appearing above paid results links to Google’s own services.

The newspaper points out that tweak is similar to a change promoted by Google in 2013, when it was trying to resolve EU antitrust concerns under the prior commissioner, Joaquín Almunia.

However rivals at the time complained the tweak was insufficient. The Commission subsequently agreed — and under Vestager’s tenure went on to hit Google with antitrust fines.

Walker doesn’t mention these any of additional antitrust complaints swirling around Google’s business in Europe, choosing to focus on highlighting changes it’s made in response to the two extant Commission antitrust rulings.

“After the Commission’s July 2018 decision, we changed the licensing model for the Google apps we build for use on Android phones, creating new, separate licenses for Google Play, the Google Chrome browser, and for Google Search. In doing so, we maintained the freedom for phone makers to install any alternative app alongside a Google app,” he writes.

Nor does he make mention of a recent change Google quietly made to the lists of default search engine choices in its Chrome browser — which expanded the “choice” he claims the company offers by surfacing more rivals. (The biggest beneficiary of that tweak is privacy search rival DuckDuckGo, which suddenly got added to the Chrome search engine lists in around 60 markets. Qwant also got added as a default choice in France.)

Talking about Android specifically Walker instead takes a subtle indirect swipe at iOS maker Apple — which now finds itself the target of competition complaints in Europe, via music streaming rival Spotify, and is potentially facing a Commission probe of its own (albeit, iOS’ marketshare in Europe is tiny vs Android). So top deflecting Google.

“On Android phones, you’ve always been able to install any search engine or browser you want, irrespective of what came pre-installed on the phone when you bought it. In fact, a typical Android phone user will usually install around 50 additional apps on their phone,” Walker writes, drawing attention to the fact that Apple does not offer iOS users as much of a literal choice as Google does.

“Now we’ll also do more to ensure that Android phone owners know about the wide choice of browsers and search engines available to download to their phones,” he adds, saying: “This will involve asking users of existing and new Android devices in Europe which browser and search apps they would like to use.”

We’ve reached out to Commission for comment, and to Google with questions about the design of its incoming browser and search app prompts for Android users in Europe and will update this report with any response.

Waymo is gearing up to put a lot more self-driving cars on the road

Waymo is opening another technical service center in the Phoenix area, an expansion that will allow the autonomous-vehicle technology startup to double its capacity in the area as it prepares to grow its commercial fleet.

The new 85,000-square-foot center will be located in Mesa and is expected to open sometime in the second half of the year. The company’s existing 60,000-square-foot facility in the Phoenix suburb of Chandler will remain.

The former Google self-driving project that spun out to become a business under Alphabet opened its first location in Chandler, Arizona in 2016. Since then the company has ramped up its testing, launched an early rider program and slowly crept toward commercial deployment. The early rider program, which launched in April 2017, had more than 400 participants the last time Waymo shared figures on the program.

In December, the company launched Waymo One, a commercial self-driving car service and accompanying app. The service isn’t widely available yet and Waymo-trained test drivers are still behind the wheel. (Waymo does have driverless vehicles on public roads in Phoenix.)

This latest announcement signals that Waymo is still committed to its initial plan to eventually cover a large portion of the sprawling metropolis of Phoenix, which is about 600 square miles. Waymo currently operates in Chandler, Tempe, Gilbert and Mesa. It also means local residents will likely encounter more Waymo self-driving vehicles on public roads — an experience that hasn’t exactly sparked joy for some. (There have been several reports recounting fits of road rage directed at these autonomous vehicles.)

Waymo’s global fleet is about 600 cars, the large majority of which are in the Phoenix area. The new technical center will act as a second dispatch center as well as a place to maintain, clean and manage the fleet, according to the company.

It also means Waymo will hire more people in the months ahead. As Waymo noted in a blog posted Tuesday, this is not the first time it has grown its operations in Phoenix. Waymo expanded its full-service center in Chandler last year to 60,000 square feet, a facility that houses its operations and support teams, including fleet technicians, fleet dispatch, fleet response and rider support.

Hands on with Google Stadia: It works, but is that enough?

SAN FRANCISCO—Shortly after Google announced its upcoming Stadia streaming platform this morning at the Game Developers Conference, the company opened up a few kiosks showing off the technology in a corner of a Moscone Center West hallway. Unfortunately, these extremely limited demos didn’t answer most of the burning questions that Google has still left unanswered about it much-hyped platform.

The most popular demo, judging by the crowds gathered around the screen, was an opportunity to play Assassin’s Creed Odyssey on a standard Chromebook via Stadia streaming. The game—running at apparently native resolution and 60 frames per second on a 1080p display—was for all intents and purposes indistinguishable from a local copy running on a high-end gaming rig. Playing and watching the games for a few minutes, I didn’t notice any of the input delay, dropped frames, or stuttering that sometimes characterizes the current state of game streaming.

The important caveat here, of course, is that the demo was running on a wired Ethernet connection hooked to the Moscone Center’s industrial-strength Internet hookup. The demo team couldn’t confirm the location for the Google data center where the game was actually running, but we can’t imagine it would be very far from the heart of San Francisco, where the demo was being played.

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Media fragmentation is annoying consumers

Deloitte’s Technology, Media and Telecommunications division published its 13th-annual Digital Media Trends survey, focused on identifying changes in the ways US consumers engage with various types of media.

Led by an independent research firm, the survey had roughly 2,000 consumer respondents across demographics – with the report categorizing respondents based on age (Gen-Z: ages 14-21, Millenials: 22-35, Gen-X: 36-52, Boomers: 53-71, and Matures: 72+).

While already accompanied by a succinct 13-page executive summary, the report can largely be summarized in just a couple of sentences: more people are using streaming or alternative media services than ever before, largely due to more user freedom and customization, though the growing quantity and fragmentation of platforms are becoming more frustrating for users to manage.

The survey results directionally echo already well-discussed dynamics, which we’ve previously dug into such as here, here and here. Instead, the most poignant aspects of the report were not the answers or conclusions themselves, but the immense level of support many of them received.

 

Somewhat interesting: