YC Demo Day vs. Due Diligence: What Investors Really Look For

Recent Events Highlight Due Diligence Challenges in the Startup Ecosystem

The startup landscape witnessed two significant occurrences within a 48-hour period: Y Combinator’s largest Demo Day on record, and the withdrawal of early investors from Dispo, a photo-sharing application. Despite appearing unrelated, these events underscore the crucial, yet often difficult, nature of thorough due diligence in the present investment climate.

Dispo Investor Exodus Following Allegations

Initial investors in Dispo moved to distance themselves from the company following an investigation that revealed allegations concerning co-creator David Dobrik, a well-known YouTuber. According to venture capitalists consulted, this decisive action to “sever all ties” with Dispo was an exceptional circumstance.

• Spark Capital opted to ‘sever all ties’ with David Dobrik’s Dispo app shortly after leading the investment round.
• Dispo’s early investors pledged to donate any potential profits derived from the photo-sharing app.

The implications of this situation are considerable. It serves as a stark reminder of the importance of comprehensive due diligence. On Equity, it was proposed that the Dispo situation should encourage venture capitalists to enhance their founder vetting processes. Information regarding Dobrik’s controversial “pranks” was readily accessible through a simple search.

Although the actions of a single individual do not necessarily reflect the character of an entire organization – Dispo’s team is reportedly strong – investors still chose to withdraw due to the implications of their financial support. This incident may create hesitation among VCs regarding investments in celebrities or influencers.

YC Demo Day and the Intensified Funding Environment

Ironically, just one day after the Dispo investors’ withdrawal, Y Combinator hosted its Demo Day, a prominent event in the startup calendar. A colleague observed that founders now face the dual challenge of gaining acceptance into Y Combinator and then distinguishing themselves within the program. This observation highlighted a key characteristic of the current funding environment: an overwhelming level of competition.

• Highlights of Y Combinator’s W21 Demo Day: Part 1
• Highlights of Y Combinator’s W21 Demo Day: Part 2
• The latest Y Combinator batch includes a record number of Indian startups.
• Y Combinator is expanding its investment in edtech within its newest cohort.
• Biotech startups incubated by Y Combinator are developing a new generation of therapies and tools.

The heightened competition led to a rapid pace of investment. One investor received communication from a participating company stating, in essence, that investment documents were available without the need for due diligence. The startup in question was valued at $100 million.

Another investor reported that a company requested investment without even scheduling a meeting with the venture capital firm. While these are isolated examples, they illustrate the growing disparity between the necessity of due diligence and the current investment frenzy.

As demonstrated by the Dispo case, thorough vetting of potential partners, supporting the appropriate startups, and securing the right funding are all beneficial. However, YC Demo Day revealed the difficulty of exercising caution when rapid progress is possible. When substantial funding is readily available, resisting the temptation can be challenging.

• Is pre-seed funding facing increased scrutiny, and will VC pandemic-posturing persist? https://twitter.com/pjux/status/1374805872371666948
• Are investors being asked to invest without reviewing the details?

I do not have a definitive solution to bridge this gap, and ultimately, the responsibility lies with the principles of individual investors and founders. However, the events of this week provide a valuable reality check regarding the current startup enthusiasm.

The remainder of this newsletter will focus on a unicorn that achieved its status in just five months, and Plaid’s challenges related to Discord. You can find me on Twitter @nmasc_.

Rapid Growth: Achieving Unicorn Status in Five Months

Pacaso, a company focused on simplifying second home ownership, has attained a $1 billion valuation within a remarkably short timeframe of five months. The company’s core concept involves reimagining the traditional timeshare model.

Their aim, as reported by Mary Ann Azevedo, is to facilitate the formation of small co-ownership groups for single-family homes, granting year-round access to all parties involved.

Stay informed with Startups Weekly, delivered to your inbox every Saturday – subscribe here to be included!

Key Takeaways: The emergence of proptech unicorns signals a lasting shift in the real estate landscape. A recent analysis by colleague Eric Eldon detailed evolving real estate trends, including the rise of co-living and a renewed interest in suburban lifestyles.

• Investor Confidence: Eldon’s recent survey of 10 proptech investors reveals optimistic projections for both residential and retail sectors following the pandemic.

Discord Acquisition and Plaid's Valuation

Major technology companies continue to emphasize the importance of community platforms. Reports indicate Microsoft is pursuing the acquisition of Discord, with potential deal valuations reaching $10 billion. Discord’s previous valuation stood at $7 billion.

The proposed price point appears somewhat conservative, according to analysis by Equity. Considering Plaid’s near-sale valuation to Visa – potentially two to three times higher – it raises questions about whether Discord is facing pricing limitations due to potential antitrust concerns.

Recent IPO and Market Activity

• Robinhood has officially submitted its paperwork for an initial public offering, generating considerable anticipation.
• Coursera is poised to approximately double its private valuation with its upcoming IPO.

These developments highlight the continued investor interest in both community-focused platforms and educational technology companies.

The disparity in valuation between Discord and Plaid suggests a complex interplay of market dynamics and regulatory considerations. Antitrust scrutiny may be influencing acquisition pricing in the tech sector.

TechCrunch Updates and Opportunities

A special discount is available for the TechCrunch Early Stage conference, a two-day virtual event designed for founders, investors, and industry operators.

Attendees can receive 20% off their ticket price by utilizing the code “TCARTICLE”.

Featured Sessions at Early Stage

• Learn strategies for bootstrapping your startup with insights from Calendly’s Tope Awotona and OpenView’s Blake Bartlett.
• Gain valuable guidance on successfully pitching your Series A fundraising round, presented by Kleiner Perkins’ Bucky Moore and moderated by a TechCrunch representative.
• Explore essential finance principles for founders with Alexa von Tobel.

TechCrunch Disrupt early-bird passes are currently available for under $100.

The Equity team may have additional surprises and exclusive offerings for attendees.

The TechCrunch List

The TechCrunch List serves as a comprehensive directory of the most active and engaged investors within the venture capital landscape.

Recommendations for this list are sourced directly from founders, ensuring its relevance and value.

News from the Past Week

Elon Musk announced that Bitcoin is now an accepted payment method for Tesla purchases within the United States.

Slack’s recently introduced direct messaging feature, Connect, is implemented on an opt-in basis, a welcome decision for many users.

The increasing reliance on a Frankencloud architecture presents a significant and growing security risk for organizations.

With the rising popularity of NFTs among artists and musicians, concerns are also increasing regarding their potential use for money laundering activities.

Adam Selipsky, the current CEO of Tableau, is set to rejoin AWS, where he will succeed Andy Jassy as CEO.

Highlights from Extra Crunch

A shift away from traditional business intelligence tools is becoming increasingly necessary for modern data analysis.

NFTs have the potential to create new synergies between the video game and fashion industries.

Venture capital and private equity funds can benefit from establishing portfolio-acceleration platforms to support their investments.

Adam Roseman of Steady, alongside investor Emmalyn Shaw, shared insights into the elements that contributed to a successful Series A deck, as well as areas for improvement.

Early Stage Event Information

Early Stage is a leading event designed to provide practical guidance for both startup entrepreneurs and investors. The event features direct insights from successful founders and VCs regarding business development, fundraising, and portfolio management.

Sessions will cover all critical aspects of building a company, including fundraising, recruiting, sales, achieving product-market fit, PR, marketing, and brand building.

Each session incorporates dedicated time for audience questions and discussion, fostering interactive learning. A 20% discount on tickets is available using the code “TCARTICLE” at checkout.