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How COVID-19 rewrote Y Combinator’s Winter 20 Demo Day

And the checks that were handed over, too.

How COVID-19 rewrote Y Combinator’s Winter 20 Demo Day

Y Combinator had to learn how to go remote, very quickly.

Image: Visuals/Protocol

It was four weeks before Y Combinator's scheduled March 2020 Demo Day, and the pressure was on Helena Merk as she tried to pivot her startup idea ahead of the big pitch.

A Duke dropout, she'd joined Y Combinator's Winter 20 class with an idea for a social app similar to Lunchclub that would connect people in a community for one-on-one meals. "YC had been this dream since I was a kid," she said, having followed the accelerator's success with alums like Instacart, Airbnb and Dropbox. "I just fangirled over YC."

But with her original idea not working, Merk had even less time for the pivot than she thought. A few days earlier, YC had announced that it was going to move its entire format online, stripping the startups of their chance to appear onstage in front of 1,000 hand-picked investors. Then on March 10, Merk and hundreds of other founders in the batch dialed into their partner video calls only to have YC's partners break more bad news. The whole event was being moved up an entire week to March 16, just a week away, and YC offered some uncharacteristically free-wheeling advice to founders: go raise funding, right away.

"Brian [Li, co-founder] and I were freaking out because we had no product essentially," Merk said. "It wasn't like we could go to investors and say give us $1 million for a janky product we had built in a week."

They weren't the only founders to be panicking. The 240 budding startups had joined Y Combinator during a frothy market that had enjoyed a bull run for years, only to graduate on March 16 — a day that coincided with the biggest single-day point drop in Dow Jones history and the start of shelter-in-place in San Francisco. Investors had their minds on a looming recession and stockpiling toilet paper from Costco, not YC's latest cohort.

Now, five months after Demo Day, the picture of how the YC W20 batch has performed after launching right into the beginning of the pandemic is only just beginning to emerge — and the results of the cohort may be a proxy for how the seed startup community will recover in the face of the pandemic.

"In past batches, there was a wider distribution of dollars, so more companies raised something," Y Combinator partner Aaron Harris told Protocol. "There were more companies this time that weren't able to raise anything, but also a lot of companies raising quite a lot."

Companies that were doing well and had a convincing story found that there was "plenty of money available," Harris said. But "if you weren't — if you were a company that, you know, didn't have much to show, had a hard time describing what you do — then there was just not very much money out there."

Merk's company Glimpse ended up being one of the ones to walk away having raised money, after its new business model of connecting people on video proved to be a pivotal pivot just ahead of the pandemic. (A successful launch on Product Hunt also helped.) But for others, "the gap just widened," said one Y Combinator founder from the batch, who asked to speak under the condition of anonymity out of fear of retribution from the YC community. "The winter 20 batch for us was pretty bad. No one knew what was going on."

Approaching the 'precipice of panic'

Y Combinator's 30th class of startups kicked off like any other. Around 500 entrepreneurs representing 240 companies flew to Mountain View from 32 countries around the world. Their numbers skewed heavily toward B2B, with 43% of the companies presenting at Demo Day falling into the category, but there were pockets of health care, consumer and robotics startups, too.

It wasn't until late February that the group started feeling some of the effects of coronavirus. Because of the international nature of the group, some founders focused on selling into markets like Europe started feeling the squeeze on their business first. Then the changes came to Silicon Valley.

"I remember I was at Haystack's office and Semil [Shah] was one of the first people who wanted to do the elbow bump thing, and I thought, 'Was this a joke?'" said Mathew Pregasen, founder of sales playbook platform Battlecard. "Because we were so focused on the business, we were not focused on Balaji [Srinivasan]'s tweets."

Srinivasan was one of the earliest venture capitalists to sound the COVID-19 alarm in Silicon Valley, and other investors started following suit by instituting "no handshake" rules. One of the early jokes about YC's W20 Demo Day was that its "Handshake Deal," an investment protocol that had been developed around the deals done at Demo Day, was supposed to lose the actual handshake part in favor of elbow bumps. (YC's first communication to founders about COVID-19 in late February was that it was adding hand-cleaning stations to the event.)

In early March, YC's partners made the call that the event would be virtual, following the trend set by other tech conferences from Mobile World Congress to SXSW. "We didn't think it made a huge amount of sense, based on the trends, to say hey let's bring 1,000 investors and founders from all over the world into the same place, so that they could meet and mingle," Harris said.

By then, the economic uncertainty of what was going to happen started creeping in. Sequoia's Black Swan memo jolted Silicon Valley into realizing things could be going south, quickly. The Dow became volatile. There were already articles about a startup reckoning coming on the heels of major layoffs in early 2020. Facebook, Google and Apple all started sending their employees home.

"It kind of felt as if we were approaching this precipice of panic," Harris said. "We looked at the progress of our startups and actually looked at the inbound interest from investors at that point and decided the best move was to cut another week of uncertainty off and move Demo Day up."

While Y Combinator generally discourages companies from raising money before Demo Day, the message on the video calls four days later announcing the date change was very clear: Raise quickly and get the investors to wire checks as fast as you can. The companies were told to not assume that investments would be available in a month's time.

The one-slide pitch

The change in the Demo Day format came as a shock to the startups preparing to deliver the classic two-minute Y Combinator Demo Day pitch. YC had toyed with the idea of building studios to record the video pitches, but ultimately scrapped the idea when it moved up the Demo Day after realizing they couldn't deliver a good quality. Instead, the classic Demo Day experience of rapid-fire pitches was reduced to a list of company names, team bios, and a single-slide summary of their company.

For founders who viewed their charisma and story as a strength, the one-slide pitch to investors was a real blow. "It just felt really sad that it accumulated into this slide," said one founder, who asked to remain anonymous since YC remains an investor in their company.

"When you give away 7% of your company for the experience of pitching to thousands of investors, it's a bit disappointing," they said. "It's really sad because our growth slowed down, and then Demo Day was not in person, and it was really hard to fundraise."

The week before Demo Day ended up being critical for a lot of companies. In interviews with more than 20 founders and investors for this story, most agreed that the companies that had conversations and closed money the week before did better than those that waited for the virtual Demo Day to evaluate investors and close a check.

After all, the tone had changed sharply from one week to the next, as the Dow dropped and shelter-in-place began. "On Twitter people were like, 'VCs are open to business,' and that's definitely not true from my perspective because they were busy buying toilet paper from Costco or trying to move to their vacation home in Tahoe," the founder said. They were able to close their round with investors they met the week before Demo Day, but had trouble raising additional capital once the lockdown started.

"In hindsight, [the date change] was the best possible move [YC] could have made because it allowed fundraising to happen before the world fell apart," Pregasen, the Battlecard founder, said. He ended up pulling together his round on the Wednesday and Thursday before Demo Day. Afraid that the San Francisco International Airport would be shut down, Pregasen spent the afternoon of the virtual Demo Day on a plane back to Florida to quarantine with his family.

"If we had fundraised a week later, I don't think we would have pulled a valuation that we got," he said. "It was very noticeable the following week, post shelter-in-place day, and it was a lot of, 'We don't know if we need to take our capital and save it for our portfolio or if we can make new investments.'"

An 'unexpected positive'

For many investors, this batch felt different, too. Several firms told Protocol they hadn't made any investments in this year's YC batch, compared to previous classes. Other seed stage investors said they saw founders coming back to them with revised or lowered funding expectations to pull together a round. Many investors declined to speak on the record, fearful that Y Combinator would uninvite them from future Demo Days.

Maven's Sara Deshpande said that her firm continued its typical approach, which is to make at most one investment per batch. It's had previous success with Y Combinator companies like Cruise, and this time backed Merk's company Glimpse, a service that (post-pivot) provides short video chats within a community for quick catch-ups, after talking to a few dozen companies.

"The biggest difference I saw was that the target round size out the gate seemed smaller out the gate," she said. "Startups were looking to raise $1 million to $1.5 million, and fewer companies looking to raise $3 million and $4 million."

Some companies also lowered their target valuations. Susa Ventures' Leo Polovets said he saw a valuation drop in the weeks following Demo Day as companies came back with different terms. "YC companies often set their own valuation caps, and about one-third of the companies I talked to came back within a week or two of Demo Day and asked if a lower cap would affect our investment decision," he said in an email. "The typical valuation drop over that few weeks was along the lines of [around] 20%. But as with most Demo Days in recent years, companies with strong traction in hot spaces had no problem raising at high valuations."

Y Combinator's Harris said that companies that did raise money didn't see much impact on their valuations. "The professional investors and the funds that make a business of investing and the angels have been at this for a long time, [and] invested aggressively at dollar values into companies and pricing that was on track with what we've seen in previous batches in the non-COVID world," he said.

One thing that didn't change about YC for investors: The FOMO. But this year, they were forced to make investment decisions on Zoom, many for the first time, and often with companies they had never met. But while that may have been unnerving so early on in lockdown, it also made it a more efficient process, allowing founders and investors to stack hours of meetings back to back instead of shuttling around in Ubers and Lyfts to run a traditional fundraising process.

It ended up being an "unexpected positive" for Modern Village's Avni Patel Thompson. A graduate of YC's W16 class, it was her second Demo Day at YC, and this time she ended up meeting two or three times the number of investors thanks to the efficiency of the format change. Some investors did balk at the size of her funding round, but that ended up being a filtering function, she said. And ultimately she was able to raise the $1 million she wanted, calling it quits by April when it was clear investors were starting to become overwhelmed. "Was it painful? Yeah it was, but I've never known fundraising not to be painful," she said.

Too soon to call it

Five months later, the challenges faced by the Winter 20 class are now becoming lessons for YC's summer 2020 batch, who graduate at the end of August. The new cohort was entirely remote, compared to W20's experience, and the virtual Demo Day is coming back.

W20 founders like Ophelia's Zack Gray missed having the pitching element during his batch, but he was still invited back to talk to the summer class about how to fundraise. His opioid addiction treatment startup was one of the success stories, having ultimately raised $2.7 million from General Catalyst and Refactor Capital at what he admitted was an "aggressive valuation." "We were forced to get a great investor before Demo Day, and so it didn't really matter," Gray said. "In fact, we didn't get very much out of Demo Day itself, but had we not gotten the commitment from a fund like General Catalyst two days before Demo Day I think it would have been a major disadvantage for us not having the opportunity to actually [get] up on stage and tell our story in person."

This time, Y Combinator's virtual Demo Day will be live over Zoom and split into two days. Harris says Y Combinator has also moved up when it starts talking to companies about fundraising earlier in the batch, relaxing slightly its previous guidance of waiting until Demo Day.

"If we look at the numbers, and look at the successful companies, honestly there is almost no correlation to a rapid round after Demo Day, and the long-term success of the company — or between the amount of money raised at Demo Day and the success of the company," he said. "It's just not the thing that matters."

It's too soon to know the real fate of the W20 batch, and the legacy of its startups will play out over the next 10 to 15 years. While there may have been some shorter term struggles to fundraise for some of the companies, like any venture return it could take just one or two home runs to call the batch a success.

"I think they will use us as an example to future founders about how you can be successful, despite everything else in the world going against you," Gray said.

Image: Yuanxin

Yuanxin Technology doesn't hide its ambition. In the first line of its prospectus, the company says its mission is to be the "first choice for patients' healthcare and medication needs in China." But the road to winning the crowded China health tech race is a long one for this Tencent- and Sequoia-backed startup, even with a recent valuation of $4 billion, according to Chinese publication Lieyunwang. Here's everything you need to know about Yuanxin Technology's forthcoming IPO on the Hong Kong Stock Exchange.

What does Yuanxin do?

There are many ways startups can crack open the health care market in China, and Yuanxin has focused on one: prescription drugs. According to its prospectus, sales of prescription drugs outside hospitals account for only 23% of the total healthcare market in China, whereas that number is 70.2% in the United States.

Yuanxin started with physical stores. Since 2015, it has opened 217 pharmacies immediately outside Chinese hospitals. "A pharmacy has to be on the main road where a patient exits the hospital. It needs to be highly accessible," Yuanxin founder He Tao told Chinese media in August. Then, patients are encouraged to refill their prescriptions on Yuanxin's online platforms and to follow up with telehealth services instead of returning to a hospital.

From there, Yuanxin has built a large product portfolio that offers online doctor visits, pharmacies and private insurance plans. It also works with enterprise clients, designing office automation and prescription management systems for hospitals and selling digital ads for big pharma.

Yuanxin's Financials

Yuanxin's annual revenues have been steadily growing from $127 million in 2018 to $365 million in 2019 and $561 million in 2020. In each of those three years, over 97% of revenue came from "out-of-hospital comprehensive patient services," which include the company's physical pharmacies and telehealth services. More specifically, approximately 83% of its retail sales derived from prescription drugs.

But the company hasn't made a profit. Yuanxin's annual losses grew from $17 million in 2018 to $26 million in 2019 and $48 million in 2020. The losses are moderate considering the ever-growing revenues, but cast doubt on whether the company can become profitable any time soon. Apart from the cost of drug supplies, the biggest spend is marketing and sales.

What's next for Yuanxin

There are still abundant opportunities in the prescription drug market. In 2020, China's National Medical Products Administration started to explore lifting the ban on selling prescription drugs online. Although it's unclear when the change will take place, it looks like more purely-online platforms will be able to write prescriptions in the future. With its established market presence, Yuanxin is likely one of the players that can benefit greatly from such a policy change.

The enterprise and health insurance businesses of Yuanxin are still fairly small (accounting for less than 3% of annual revenue), but this is where the company sees an opportunity for future growth. Yuanxin is particularly hoping to power its growth with data and artificial intelligence. It boasts a database of 14 million prescriptions accumulated over years, and the company says the data can be used in many ways: designing private insurance plans, training doctors and offering chronic disease management services. The company says it currently employs 509 people on its R&D team, including 437 software engineers and 22 data engineers and scientists.

What Could Go Wrong?

The COVID-19 pandemic has helped sell the story of digital health care, but Yuanxin isn't the only company benefiting from this opportunity. 2020 has seen a slew of Chinese health tech companies rise. They either completed their IPO process before Yuanxin (like JD, Alibaba and Ping An's healthcare subsidiaries) or are close to it (WeDoctor and DXY). In this crowded sector, Yuanxin faces competition from both companies with Big Tech parent companies behind them and startups that have their own specialized advantages.

Like each of its competitors, Yuanxin needs to be careful with how it processes patient data — some of the most sensitive personal data online. Recent Chinese legislation around personal data has made it clear that it will be increasingly difficult to monetize user data. In the prospectus, Yuanxin elaborately explained how it anonymizes data and prevents data from being leaked or hacked, but it also admitted that it cannot foresee what future policies will be introduced.

Who Gets Rich

  • Yuanxin's founder and CEO He Tao and SVP He Weizhuang own 29.82% of the company's shares through a jointly controlled company. (It's unclear whether He Tao and He Weizhuang are related.)
  • Tencent owns 19.55% of the shares.
  • Sequoia owns 16.21% of the shares.
  • Other major investors include Qiming, Starquest Capital and Kunling, which respectively own 7.12%, 6.51% and 5.32% of the shares.

What People Are Saying

  • "The demands of patients, hospitals, insurance companies, pharmacies and pharmaceutical companies are all different. How to meet each individual demand and find a core profit model is the key to Yuanxin Technology's future growth." — Xu Yuchen, insurance industry analyst and member of China Association of Actuaries, in Chinese publication Lanjinger.
  • "The window of opportunity caused by the pandemic, as well as the high valuations of those companies that have gone public, brings hope to other medical services companies…[But] the window of opportunity is closing and the potential of Internet healthcare is yet to be explored with new ideas. Therefore, traditional, asset-heavy healthcare companies need to take this opportunity and go public as soon as possible." —Wang Hang, founder and CEO of online healthcare platform Haodf, in state media China.com.

Zeyi Yang
Zeyi Yang is a reporter with Protocol | China. Previously, he worked as a reporting fellow for the digital magazine Rest of World, covering the intersection of technology and culture in China and neighboring countries. He has also contributed to the South China Morning Post, Nikkei Asia, Columbia Journalism Review, among other publications. In his spare time, Zeyi co-founded a Mandarin podcast that tells LGBTQ stories in China. He has been playing Pokemon for 14 years and has a weird favorite pick.

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