Silicon Valley has been captivated by the prospect of AI, not only as a productivity enhancer but also as a catalyst for creating successful companies with much leaner teams than in the past.
Stories abound of AI startups quickly reaching tens of millions in revenue with headcount as low as 20 people. With less overhead, some startups may be inspired to take less venture capital funding, especially at the earliest stages.
Terrence Rohan, an investor with Otherwise Fund who’s been investing in Y Combinator since 2010, says he’s noticing a “vibe shift” from some founders in the current batch of the famed accelerator.
He described how one founder felt about it on X last week: “People used to climb Everest and they needed oxygen. Today, people climb it without oxygen. I want to summit Everest and use as little oxygen (VC) as possible.”
This founder wasn’t just saying this because of lack of VC interest. The round was oversubscribed, Rohan said, meaning lots of VCs wanted in.
“Smart founder” was the reaction of Alexis Ohanian, the founder of VC firm Seven Seven Six and co-founder of Reddit.
Raising less means founders maintain a larger ownership stake of their companies. By doing that, founders give themselves more ongoing business, and perhaps eventually exit, options, Rohan told TechCrunch. It’s actually becoming more common for YC startups to raise less capital than was offered to them by investors, TechCrunch reported last year.
Less funding, big mistake?
But Parker Conrad, co-founder and CEO of Rippling, the HR tech startup with a $13.4 billion valuation, disagreed that having less capital will help a startup succeed.
“The way this will play out is a competitor will raise a ton of financing, invest more deeply in R&D, build a better product, and absolutely crush this guy with sales and marketing. You have to play the game on the field,” he wrote on X.
While building a good product with a small engineering team may be possible, Conrad points out that having more funding can accelerate company growth.
Rohan told TechCrunch that Conrad’s point is a classic one, but he thinks the “game on the field is changing.”
“Folks are getting to substantial revenue quicker and with fewer people, and it’s a belief that maybe they can sustain that revenue with fewer people,” Rohan said.
It’s too early in the AI market to say if Rohan and the upstart founders are right. The initial examples suggest that fast-growth AI companies are still raising as much as they can.
For instance, Anysphere, which makes the popular AI-coding assistant Cursor, reportedly reached $100 million in annual recurring revenue (ARR) earlier this year with a team of only 20 people. Anysphere is reportedly now in talks to secure capital at a $10 billion valuation mere months after raising its previous round.
Meanwhile, ElevenLabs, an AI-powered voice-cloning startup, hit a similar ARR with only 50 people. The company announced its $180 million Series C at a $3.3 billion valuation in January, a round that was likely secured when the company’s ARR was around $80 million, as TechCrunch previously reported.
In the meantime, Anysphere’s headcount grew to 90 people and ElevenLabs’ to 200, according to data provided by PitchBook.
Other AI startups are securing funding at a rapid pace, too, demonstrating that startups are still eager to accumulate capital even if they are maintaining a relatively low staff size.
“VCs are very charming and persuasive, and they’re throwing money,” said Rohan, adding that these companies are likely obtaining funding with low dilution, meaning they aren’t giving up significant ownership.
But YC founders are now much more aware of the pros and cons of venture capital, he said.
Many startups that secured funding at inflated valuations in 2020 and 2021 were later forced to raise capital at significantly lower valuations, known as a down round.
Perhaps more importantly, raising a lot of venture capital from elite VC firms is no longer the goal for some YC founders.
“It’s just a different tone and conversation versus, ‘I want to raise this round, and then I want to have Sequoia and Benchmark lead my series A,’” Rohan said.