What the mid-term frenzy means for startups

Welcome to Startups Weekly, a nuanced look at this week’s startup news and trends. To get this in your inbox, subscribe here.

Hey guys. It is Kyle, filling in this issue for Natasha, who is taking a much-needed break from the news cycle (and the spectacle that has become Twitter). Although this is my first Startups Weekly column, you’ve probably seen me on TC here and there, mainly covering venture, AI, and venture-related items. It’s a real pleasure to round up this week’s startup news—in part because it doesn’t center around Musk’s shenanigans.

But before we dwell on the weekend together, let’s recap the week that was marked by the US midterm elections

As disgusting and worrisome as the US election cycle can be, the outcome always has big implications for the tech industry. US-based chip makers are that hope for relief as the US increasingly disengages from China. Crypto businesses are waiting regulations to establish safety fences for so-called stablecoins and settle jurisdictional issues. And the biggest tech giants are bracing for a possible last-ditch effort by the White House to pass antitrust legislation — pending, of course, the political climate after the midterms.

It goes without saying that the stakes are high. The sanctions, along with supply chain constraints and inflation, threaten to depress the U.S. chipmaking industry — one chip machinery firm, Lam Research, already projected losses up to $2.5 billion in revenue next year due to newly imposed trade rules. Antitrust bills, if passed, could significantly limit the ability of Amazon, Meta, Microsoft and other technology operators to acquire and penalize competitors to improve their own products and services.

Unsurprisingly, the industry is out in force for the 2022 midterms, judging by the top donors. Google, Amazon, Meta and their trade groups poured out almost $100 million in lobbying as they try to defeat the antitrust law — and its supporters. Meanwhile, according to art analysis from the Washington Post, FTX CEO Sam Bankman-Fried, Larry Ellison and Peter Thiel have given tens of millions of dollars to their favored campaigns, exerting a powerful technological influence on the bitter field.

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

With the exception of those in sectors with bipartisan support, such as defense, startups may be the ones to suffer the most in this politically divisive stretch — especially those in the chip, green, and crypto businesses. At least one study finds that congressional gridlock contributes to income inequality, while another suggests that political gridlock has a greater negative impact even than 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 security programs, leading to a prolonged recovery. There is also the prospect of debt ceiling battles, which could be harmful in a different way. Recall that as a result of the debt ceiling controversy 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 crash by more than 5 %.

In a note to investors, Morgan Stanley predicts that the current division in Congress means that 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 to the economy.”

Of course, partisan gridlock doesn’t have to be entirely a bad thing as far as the economy or startups are concerned. According to Edelman Financial Engines data cited by CNN Business, the S&P 500 has returned 16.9% annually since 1948 during the nine years a Democrat was in the White House and Republicans held majorities in both houses of Congress. . That compares with 15.1 percent during periods of full Democratic control and 15.9 percent during years of unified GOP government.

A silver lining, but a relatively weak one, of course.

In the rest of this newsletter – which is less unpleasant, I promise! — we’ll talk about Twitter’s fledgling user base, the rise of generative AI, and the enduring appeal of e-commerce to VCs. For more content along these lines, follow me – I’m on @Kyle_L_Wiggers on Twitter (Mastodon migration coming).

Twitter’s losses are competitors’ gains

Not an hour goes by without news about Twitter’s shaky transition under new leadership. Last weekend, the network began banning certain parody accounts after a rule change led by Musk, including accounts of famous comedians. Then on Tuesday came a report by Platformer’s Casey Newton that Musk is considering putting all of Twitter behind a paywall. ike

Unpredictable policymaking has begun to scare away consumers, some of whom are leaving for what they see as greener pastures. This benefits startups like Mastodon, a German-based platform that offers an experience in many ways comparable to that of Twitter. (For a primer on Mastodon’s history, how it works, and how to join, read my colleague Amanda Sieberling piecewhich does a thorough job of breaking it all down.)

Here’s why it’s important: Mastodon has seen rapid growth since Elon Musk’s takeover of Twitter, with approx half a million users joined the network on October 27. Although the company is for-profit, its expansion could prompt Twitter rivals to emerge from the ashes — and those rivals’ VC backing. The former director of Google Area 120 Gabor Celle is among the opportunists, announcement on Monday that it has secured interest (and capital pledges) from investors and a former Twitter executive to build a Twitter alternative.

twitter bird with mask, background of checked bookmarks

Image Credits: Bryce Durbin / TechCrunch

Let the AI ​​generate it

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

Deepfaked porn and generated by AI art contest entries may dominate the headlines. But investors see huge potential in generative AI built for the enterprise. This week, TechCrunch’s Rita Liao covered Movie, a two-year-old startup that uses generative AI along with other AI frameworks to make videos with talking human avatars. A little earlier in the fall I wrote about Jasperan AI content marketing platform that raised $125 million at a $1.5 billion valuation.

Here’s why it’s important: VCs are increasingly bullish on generative AI. In a recent article on its website, VC 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 in economic value”. Trillions may sound optimistic, but what’s certain is that LP’s willingness to write checks is fueling an explosion of new ventures 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? It becomes something of a carpet salesman, apparently. Really. My colleague Rebecca Shkutak describes Foley’s latest venture for TC+, called Ernesta. Aiming to launch in spring 2023, Ernesta — backed by $25 million in venture capital — will sell custom carpets through a direct-to-consumer (DTC) strategy.

Here’s why it’s important: Rugs online can seem random. But the fact that Ernesta secured a large tranche so quickly points to continued investor enthusiasm around e-commerce – despite souring opinions on DTC. The pandemic has put a strain on online shopping, boosting digital merchandise sales to $815.4 billion in 2020 from $671.2 billion in 2019, according to the U.S. Census Bureau’s annual retail survey. As for DTC, high-profile failures like Casper, Brandless and Outdoor Voices have made some VCs unsure. But as Ernesta’s success shows, funding hasn’t dried up just yet. The carpet company joins Rad Power Bikes, Madison Reed and Glossier among the DTC brands that are landed tens of millions in equity at a significant valuation increase.

Image Credits: Cavan Images/Getty Images

A few notes

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

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Got a story tip? Feel free to click mine inbox. I’m particularly 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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