What the midterm madness means for startups • TechCrunch

Welcome to Startups Weekly, a nuanced version of this week’s startup news and trends. To receive this in your inbox, subscribe here.

Hey people. It is Kyle, completing this issue for Natasha, who is taking a much-needed break from the news cycle (and the spectacle that Twitter has become). While this is my first Startups Weekly column, you’ve probably seen me on TC here and there, mostly covering venture, AI, and enterprise-related articles. It’s a real treat to wrap up this week’s startup news, in part because it doesn’t focus on Musk’s shenanigans.

But before we collectively unwind from the weekend, let’s recap the week, which was marked by the US midterm elections.

As disgusting and distressing as the US election cycle has become, the outcome always has major implications for the tech industry. US-based chipmakers are hoping for relief as the US disengages more and more from China. Crypto companies are awaiting regulations to establish protection measures for so-called stablecoins and resolve jurisdictional issues. And the biggest tech giants are bracing for a possible last-minute effort by the White House to pass antitrust legislation, pending, of course, the post-midterm political climate.

Needless to say, the stakes are high. The sanctions, along with supply chain constraints and inflation, threaten to depress the US chipmaking industry: one chip machine company, Lam Research, has already forecast losses of up to $2.5k. million in revenue next year due to the new business rules imposed. The antitrust bills, if passed, could significantly restrict the ability of Amazon, Meta, Microsoft and other tech incumbents to acquire and punish rivals for powering their own products and services.

Unsurprisingly, the industry was in for the 2022 midterms, judging by the major donors. Google, Amazon, Meta, and their trade groups spent nearly $100 million on lobbying as they sought to derail antitrust legislation and its supporters. Meanwhile, according to a Washington Post analysis, FTX CEO Sam Bankman-Fried, Larry Ellison, and Peter Thiel donated tens of millions of dollars to their pet campaigns, exerting significant technological influence in the acrimonious field.

Whether the industry managed to secure a bright two-year future for itself is up for debate.

With the exception of those in sectors with bipartisan support, such as defense, startups could suffer the most in this politically divided stretch, especially those in the chip manufacturing, green, and crypto businesses. At least one study finds that congressional gridlock contributes to income inequality, while another implies that political gridlocks have a greater negative impact than even hostile government policies on a company’s ability to innovate.

Consider how a recession might play out. Assuming Congress is slow to act (as divided branches often are), there could be less federal government spending on social safety net programs, leading to a protracted recovery. There is also the possibility of debt ceiling fights, which could be detrimental in a different way. Remember that as a result of debt ceiling disputes during President Barack Obama’s first term, the US lost its perfect AAA credit rating from Standard & Poor’s in August 2011, causing the stock market to fell more than 5%.

In a note to investors, Morgan Stanley predicts that the current split in Congress means fiscal expansion will be reactive rather than proactive over the next two years, coming only as “a reaction to deteriorating economic conditions or an external shock.” In the economy”.

Of course, partisan gridlock doesn’t have to be all bad when it comes to the economy or startups. According to data from Edelman Financial Engines cited in a CNN Business article, the S&P 500 had an annualized return of 16.9% since 1948 during the nine years in which a Democrat was in the White House and Republicans had a majority in both chambers. congressional. That compares with 15.1% during periods of full Democratic control and 15.9% in years when there was a unified Republican government.

A silver lining, but a relatively weak one, to be sure.

In the rest of this newsletter, which is less depressing, I promise! We’ll talk about the user base fleeing Twitter, the rise of generative AI, and the enduring VC appeal of eCommerce. For more content along those lines, follow me: I’m on @Kyle_L_Wiggers on Twitter (Mastodon migration pending).

Twitter’s losses are rivals’ gains

Not an hour goes by without news of Twitter’s difficult transition under new management. Last weekend, the network began banning certain parody accounts following a Musk-led rule change, including accounts of high-profile comedians. Then on Tuesday came a report from Platformer’s Casey Newton that Musk is considering putting all of Twitter behind a paywall. Oh!

Unpredictable policymaking has begun to scare users, some of whom are turning to what they see as greener pastures. That benefits startups like Mastodon, a Germany-based platform that offers an experience comparable in many ways to Twitter. (For an introduction to the history of Mastodon, how it works, and how to join, read my colleague Amanda Siberling’s article, which does a thorough job of breaking it all down.)

Here’s why it’s important: Mastodon has seen rapid growth since Elon Musk took over Twitter, with almost half a million users joining the network since October 27. While the company is not for profit, its expansion could fuel the rise of Twitter’s rivals from the ashes, and the venture capital backing of those rivals. Former Google Area 120 director Gabor Cselle is among the opportunists, announcing on Monday that he garnered interest (and pledges of capital) from investors and a former Twitter executive to build an alternative to Twitter.

twitter bird with mask, background of verified checkmarks

Image credits: Bryce Durbin/TechCrunch

Let the AI ​​generate it

Generative AI is the new thing in technology. Well, maybe not new, but it recently entered the VC lexicon thanks to high-profile text-to-image AI systems like OpenAI’s DALL-E 2 and Stability AI’s Stable Diffusion. Stability AI recently raised $101 million at a reported valuation of more than $1 billion, and OpenAI is said to be in talks to raise capital from Microsoft and other backers at a valuation closer to $20 billion.

Counterfeit porn and AI-generated art contest entries could be dominating the headlines. But investors see huge potential in generative AI built for the company. TechCrunch’s Rita Liao this week covered Movio, a two-year-old startup leveraging generative AI alongside other AI frameworks to make videos with talking human avatars. Earlier in the fall, I wrote about Jasper, an AI content platform for marketing that brought in $125 million at a $1.5 billion valuation.

Here’s why it’s important: Venture capitalists are increasingly bullish on generative AI. In a recent article on its website, venture capital firm Sequoia muses that generative AI, referring to any AI that can generate text, photos, audio, or video, has the potential to “generate trillions of dollars of economic value.” . Trillions may sound optimistic, but what is certain is that LP’s willingness to write checks is fueling an explosion of startups in the nascent space.

stable diffusion

Image credits: Bryce Durbin/TechCrunch

From home workouts to home decor.

What has Peloton co-founder John Foley been up to since leaving the company in September? Becoming some kind of rug salesman, apparently. In fact. My colleague Rebecca Szkutak profiles Foley’s latest adventure for TC+, called Ernesta. Aiming to launch in spring 2023, Ernesta, backed by $25 million in venture capital, will sell custom rugs through a direct-to-consumer (DTC) strategy.

Here’s why it’s important: Online rugs may seem random. But the fact that Ernesta got a big tranche so quickly points to continued investor enthusiasm for e-commerce, despite sour views on DTC. The pandemic supercharged online shopping, driving digital sales of goods to $815.4 billion in 2020 from $671.2 billion in 2019, according to the US Census Bureau’s Annual Survey of Retail Trade. As for DTC, high-profile flops like Casper, Brandless, and Outdoor Voices have made some VCs pause to be sure. But as Ernesta’s success shows, the funding has not yet dried up. The carpet company joins Rad Power Bikes, Madison Reed and Glossier among DTC brands that have made tens of millions in stock with significant valuation increases.

Image credits: Cavan Images/Getty Images

some notes

  • If you missed last week’s newsletter, read it here: Tweep’s Twitter.
  • TechCrunch is going to Miami next week to host, you guessed it, a crypto conference. Some of my absolute favorite people will be there, including our star crypto team, so be sure to stop by and feel free to DM me for a sweet, sweet discount code. Buy tickets and see our line up here.
  • Do you miss Natasha? Don’t worry, she’ll be back next week to write the next issue of Startups Weekly. Be on the lookout!

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Do you have a history tip? Feel free to hit my inbox. I’m especially interested in generative AI these days, so don’t be a stranger if you’re working on something related to it.


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