What do Stripe and Airbnb have in common?
They were both incubated by startup accelerator Y Combinator during the financial crisis in 2009. Now, many VC firms are hoping lightning will strike again as they have been rolling out and expanding accelerator-style programs of their own recently to source founders before they even have fleshed out a vision for their startup.
Y Combinator, the most prolific generalist accelerator, saw its applications skyrocket 20% in 2022. A spokesperson for the firm said that in its most recent batch of applicants, they received over 20,000 and accepted 282 startups—making their acceptance rate 1.4%. “This was one of the most competitive batches ever,” the spokesperson explained.
Sequoia and Accel are both already expanding recently launched accelerator programs. Accel redesigned its accelerator program, called Atoms, to focus specifically on A.I. and “Industry 5.0.” Each company selected will receive “personalized learning, sector-specific mentors, and up to $500,000 in seed investment,” according to Accel.
Sequoia announced in January that it was going to increase the class size of its Arc “catalyst” program that launched in March 2022, up from two classes. The firm also rolled out a $195 million seed fund in January. Andreessen Horowitz launched its own a16z START program last year and just launched a $500 million seed fund to target companies in its “American Dynamism” investing category.
“We’ve seen a lot of these large firms just add a seed strategy to their investment base that allows them to increase the pool of LPs, and they’ll get those LPs that want a little higher risk in their portfolio,” explained PitchBook venture capital analyst Kyle Stanford. “Accelerators are one way a firm can build a brand and get some really good talent and technologies through there, especially for A.I. If you can source 15 A.I. companies through an accelerator program, that’s 15 opportunities that you have to do a deeper due diligence than you might if you just came across 15 companies through a pitch deck,” said Stanford.
Yet seed investing is notoriously risky, and working with a company to help build out its vision is a much more involved process than writing a check. According to investor Bob Ackerman, who cofounded the cybersecurity foundry DataTribe, launching these programs is in vogue now, but not everyone will necessarily be successful. “The venture community is populated by visionary sheep,” he said, explaining that he sees many VCs wooed by low valuations in seed-stage companies. “If you’re gonna step into that real early stage, you need to be honest with yourself in terms of asking, ‘Do we have the expertise and the resources to take a raw idea and shape it into a viable fundable business?’ I think that’s where, ultimately, the rubber hits the road. And some of these groups are going to struggle,” he added.
Some have stumbled. For example, accelerator Techstars abruptly announced in late March it was discontinuing its Swedish arm after its current cohort due to high costs, market conditions, and the difficulty of running the program.
Yet for firms that are successful, there are huge profits ahead. “In a downturn valuations are going to be relatively depressed…but the potential upside, especially if the market turns around in a year and we have another 10-year bull market, that’s a lot of tailwinds that you can capture by starting a company now,” said Stanford.
“It will be a very strong group of startups that will come out of this environment because they’ve had to basically survive a test by fire,” added Ackerman.
Lucy Brewster
Email: lucille.brewster@fortune.com
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Jackson Fordyce curated the deals section of today’s newsletter.
VENTURE DEALS
- UVeye, a Teaneck, N.J.- and Tel Aviv-based automated vehicle inspection systems developer for the auto industry, raised $100 million in Series D funding. Hanaco VC led the round and was joined by GM Ventures, CarMax, W.R. Berkley Corporation, F.I.T. Ventures, and others.
- Slash, a San Francisco-based online banking platform for young entrepreneurs, raised $15 million in Series A funding. NEA, Y Combinator, and the founders of Plaid invested in the round.
- Blockworks, a New York-based crypto media company, raised $12 million in funding. 10T Holdings led the round and was joined by Framework Ventures and crypto investor Santiago Santos.
- Firmbase, a Tel Aviv-based financial planning and analysis platform, raised $12 million in funding. S Capital led the round and was joined by Meron Capital and others.
- Charlie, a Los Angeles-based banking platform, raised $7.5 in funding. Better Tomorrow Ventures, Expa, Carbon Health chief product officer Ayokunle Omojola, and Gokul Rajaram invested in the round.
- Antimetal, a New York-based cloud cost optimization platform, raised $4.3 million in seed funding. Framework Ventures led the round and was joined by Chapter One, IDEO CoLab Ventures, and others.
- Werewool, a Brooklyn-based sustainable performance fibers company, raised $3.7 million in seed funding co-led by Material Impact and Sofinnova Partners.
- AudioShake, a San Francisco-based A.I. music company, raised $2.7 million in seed funding. Indicator Ventures led the round and was joined by Precursor Ventures, Side Door Ventures, and others.
- Mycocycle, a Chicago-based waste reduction biotech using mushrooms, raised $2.2 million in seed funding. Anthropocene Ventures led the round and was joined by the TELUS Pollinator Fund for Good, Alumni Ventures, Telescopic Ventures, and others.
- Sustainable Skylines, a Miami-based aerial drone advertising and data analytics company, raised $1 million in pre-seed funding. The former head of Americas of equity capital markets at J.P. Morgan Jeffrey Zajkowski, Interstate Outdoor Advertising CEO Drew Katz, Arcadia Power senior vice president of finance and head of corporate development Paul Mulé, and others invested in the round.
PRIVATE EQUITY
- American Clinical Research Services, backed by Lattice Capital, acquired Clinical Site Services, a Linthicum, Md.-based patient recruitment solutions provider, and Patient Advertising Guru, a Melville, N.Y.-based patient advertising platform. Financial terms were not disclosed.
- Bernhard Capital Partners agreed to acquire Duotech Services, a Franklin, N.C.-based radar and related systems services provider. Financial terms were not disclosed.
- Court Square Capital Partners acquired a majority stake in Team Select Home Care, a Phoenix-based home care platform. Financial terms were not disclosed.
- Summit Partners acquired a minority stake in Keeper Security, a Chicago-based cybersecurity software provider. Financial terms were not disclosed.
- United Land Services, backed by Centre Partners and LP First Capital, acquired Greenway Lawn & Landscape, a Jacksonville, Fla.-based landscaping services company, and Sanford Tree Service, a Jacksonville, Fla.-based tree services provider. Financial terms were not disclosed.
- Yellow Wood Partners acquired Suave, the beauty and personal care brand of Unilever. Financial terms were not disclosed.
OTHER
- Tempur Sealy agreed to acquire Mattress Firm, a Houston-based mattress retailer. The deal is valued at approximately $4 billion.
- Oura agreed to acquire Proxy, a San Francisco-based digital identification tools developer, for $165 million, according to Bloomberg.
- MUFG Bank invested $40 million in Liquidity Capital, a New York- and Tel Aviv-based investment firm.
- 1WorldSync acquired atrify, a Cologne, Germany-based product content technology and consulting company. Financial terms were not disclosed.
- QuestionPro acquired Patient Safety Group, a San Jose-based data collection and analysis platform for health systems and hospitals, from Smart Patients. Financial terms were not disclosed.
- WOW Carwash acquired Soap City Express Car Wash, a Las Vegas-based car wash site. Financial terms were not disclosed.
IPOS
- Steinway Musical Instruments Holdings, a New York-based piano manufacturer, withdrew its plans for an initial public offering.
FUNDS + FUNDS OF FUNDS
- Mayfield, a Menlo Park, Calif.-based venture capital firm, raised $955 million across two funds. $580 million will be dedicated to seed to Series A rounds and $375 million will be dedicated to portfolio companies and new Series B investments.
- Andreessen Horowitz, a Menlo Park, Calif.-based venture capital firm, allocated $500 million for a fund focused on early-stage companies that support American national interests, such as reshoring manufacturing, public safety, or defense.
- RX3 Growth Partners, an Orange County, Calif.-based private equity firm, raised $150 million for a fund focused on growth-stage consumer-focused companies.
PEOPLE
- Clean Energy Ventures, a Boston-based venture capital firm, hired Matt Cohen as investment principal. Formerly, he was with Pangaea Ventures.
- Fortuna Investments, a Los Angeles-, Miami-, and Vancouver-based venture capital firm, hired Frostee Rucker as vice president of its west coast office. Formerly, he was an NFL athlete.
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