• Y Combinator's Demo Day used to be the hottest in-person early-stage event in Silicon Valley.
  • But since the event went virtual, many of the top startups raise before Demo Day, VCs say.  
  • Expensive valuations have also made investors more picky about which YC startups they want to back. 

For early-stage venture capitalists, few days on the calendar used to compare to Y Combinator's biannual Demo Day.

It was a day when founders would launch their companies publicly to a large audience, and investors could finally see the results of what happened behind the scenes with the storied Silicon Valley accelerator's latest class. It's also where founders and investors would come together in person, shake hands, and hopefully make deals.

But after three years of virtual Demo Days, the high anticipation and sheen of those startup debuts has begun to fade, investors have told Insider. "Even if it was in person, we don't even go anymore," said one investor, who asked to remain anonymous.

"All of the funds try to go meet the best YC companies before Demo Day," the same investor told Insider. "The top funds are already meeting with YC companies pre-Demo Day and are already investing."

Raising outside funding ahead of Demo Day was once considered forbidden, but now is the new normal ahead of the virtual event, the investor said. For the summer 2023 batch, Demo Day is happening virtually on Sept. 6 and 7.

"I think Demo Day has lot some of its shine because companies are raising rounds earlier, and for me, it's important to get in early. If there's a hot startup raising before Demo Day, that valuation is going to skyrocket," said Erik Bruckner, the general partner at the Columbus, Ohio-based Bruckner Ventures.

When asked about startups raising before Demo Day, Y Combinator president and CEO Garry Tan told Insider in an emailed statement that "lots of the best companies raise at Demo Day and after."

"Coinbase, Instacart, Whatnot, Rappi, Airbyte, Retool — you could have gotten into their rounds at Demo Day. That has been true for years and it's still true now," he said.

One of the biggest factors contributing to the early fundraising is that larger multistage funds, which previously wouldn't touch these seed rounds, have been swooping in and filling rounds for the buzziest companies before the emerging funds or angel syndicates can get into a deal, said Bruckner.

They're also able to take on the high price tag that now comes with YC startups, which many emerging fund managers have long complained about. When Y Combinator changed its standard deal for admitted startups, it said it would invest $500,000 in companies in two separate SAFEs, or simple agreements for future equity. The first, $125,000 in return for 7% of a startup, and the second, $375,000 with a most favored nation provision, meaning it will get the best terms offered to future backers for its investment.

The fact that Y Combinator takes such high of an ownership percentage has led founders to price their rounds much higher than before, and small-check investors will get very little ownership for their money.

Startup seed-stage valuations have not dropped this year and are on par with previous years. The median pre-money valuation for seed startups was $10 million in the second quarter, according to a PitchBook report.

"Given these founders are raising at un-investable prices around Demo Day, more and more often we are passing due to price and revisiting in 12 months!" wrote Jeff Weinstein, a partner at an angel-led early-stage fund FJ Labs, in a LinkedIn post.

Yet, Y Combinator believes having access to more investors is a good thing for its chosen startups. In May, Tan touted the benefits of a virtual Demo Day for YC founders at the Axios BFD conference, saying founders could raise from a wider pool of investors than just those that could attend in person. "Demo Day done on Zoom means the founders can raise more money," he said at the conference.

But all of these factors combined means that fundraising could be tougher in this market for founders that haven't been able to land funding ahead of Demo Day. "It's not like, 'Oh, now that you have the YC stamp, you're gonna raise," said one early-stage investor. "Now that you have a YC stamp, you still might not." For an investor, if all of the best deals are gobbled up ahead of Demo Day, attending the virtual event seems less desirable, the investor said.

Many founders and investors also questioned the value of the YC brand more during the pandemic, when the accelerator went virtual. But with smaller class sizes, a more targeted focus on early-stage investing, and over a year into Tan's tenure, some of these whispers are quieting down.

"I see signal in the YC name, but maybe a little bit less than a couple of years ago," one investor said.