What mid-term madness means for startups

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

Hey, people. This is Kyle, filling in this number for Natasha, who is taking a much-needed break from the news cycle (and the spectacle that Twitter has become). Although this is my first Startups Weekly column, you’ve probably seen me on TC here and there, mostly covering venture capital, AI, and business topics. It’s a real pleasure to wrap up this week’s startup news, in part because it’s not centered around Musk’s shenanigans.

But before we collectively stop for the weekend, let’s recap the week, which was marked by the midterm elections in the United States.

As loathsome and distressing as the US election cycle has become, the outcome still has major implications for the tech industry. US-based chipmakers are hoping for relief as the US increasingly separates from China. Crypto firms are waiting for regulations to establish safeguards for so-called stablecoins and address jurisdictional issues. And the biggest tech giants are bracing for a possible last-ditch push by the White House to pass antitrust legislation — pending, of course, the post-midterm political climate.

It goes without saying that the stakes are high. Sanctions, along with supply chain constraints and inflation, are threatening to depress the U.S. chip manufacturing industry — chip machine firm Lam Research has previously predicted losses that could reach $2.5 billion in revenue next year due to newly imposed trade rules. The antitrust bills, if passed, could significantly restrict the ability of Amazon, Meta, Microsoft and other incumbent technology operators to acquire and punish rivals to improve their own products and services.

Unsurprisingly, the industry was in full force for the 2022 midterms, judging by major donors. Google, Amazon, Meta and their trade groups have invested nearly $100 million in lobbying as they seek to derail antitrust legislation — and its supporters. Meanwhile, according to a Washington Post analysis, FTX CEO Sam Bankman-Fried, Larry Ellison and Peter Thiel have donated tens of millions of dollars to their favorite campaigns, wielding strong technological influence in the acerbic field.

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

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

Consider how a recession might unfold. 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 prospect of struggles against the debt ceiling, which could be damaging in another aspect. Recall that following the disputes over the debt ceiling during President Barack Obama’s first term, the United States lost its perfect AAA credit rating from Standard & Poor’s in August 2011, causing the stock market to fall by more than 5%.

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

Of course, partisan gridlock isn’t necessarily a bad thing 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 has had an annualized return of 16.9% since 1948 during the nine years a Democrat was in the White House and Republicans had a majority. in both houses of Congress. That compares to 15.1% during periods of full Democratic control and 15.9% in years when there was a unified GOP government.

A silver lining, but relatively weak, yes.

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

Twitter’s losses are rivals’ gains

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

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

Here’s why it’s important: Mastodon has grown rapidly since Elon Musk took over Twitter, with nearly half a million users joining the network since October 27. Although the company is a nonprofit, its expansion could raise Twitter’s rivals — and those rivals’ VC backing — from the ashes. Gabor Cselle, former director of Google Area 120, is among the opportunists, announcing on Monday that he secured interest (and pledges of capital) from investors and a former Twitter executive to build an alternative to Twitter.

Let the AI ​​generate it

Generative AI is the hot new thing in technology. Well, maybe not new, but it has recently entered the VC lexicon thanks to high-level 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 over $1 billion, and OpenAI is reportedly in talks to secure capital from Microsoft and other backers at a valuation approaching $20 billion.

Deepfake porn and AI-generated art contests could grab headlines. But investors see huge potential in generative AI designed for the enterprise. TechCrunch’s Rita Liao this week covered Movio, a two-year-old startup that leverages generative AI along with other AI frameworks to create videos featuring talking human avatars. Earlier in the fall, I wrote about Jasper, an AI content platform for marketing that snagged $125 million at a $1.5 billion valuation.

Here’s why it’s important: VCs are increasingly optimistic about generative AI. In a recent post on its website, venture capital firm Sequoia believes that generative AI – referring to any AI capable of generating text, photos, audio or video – has the potential to “generate trillions of dollars of economic value”. Trillions might sound optimistic, but what is certain is that LP’s drive to write checks is fueling an explosion of new business in the budding space.

From home workouts to home decorating

What has Peloton co-founder John Foley been up to since leaving the company in September? Become some kind of rug salesman, apparently. Really. My colleague Rebecca Szkutak describes Foley’s latest venture for TC+, called Ernesta. Aiming for a spring 2023 launch, 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 can seem random. But the fact that Ernesta got a sizable slice so quickly indicates investors’ continued enthusiasm for e-commerce – despite soured opinions on DTC. The pandemic has boosted online shopping, pushing digital sales of goods to $815.4 billion in 2020 from $671.2 billion in 2019, according to the US Census Bureau’s annual retail trade survey. . As for DTC, high-profile flops like Casper, Brandless, and Outdoor Voices have given some VCs pause to be sure. But as Ernesta’s success shows, the funding hasn’t dried up yet. The carpet company joins Rad Power Bikes, Madison Reed and Glossier among DTC brands that have landed tens of millions in equity at significant valuation increases.

A few comments

• 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 star crypto team, so be sure to head over and feel free to DM me for a sweet and sweet discount code. Buy tickets and discover our program here.
• Do you miss Natasha? Don’t worry, she’ll be back next week to write the next edition of Startups Weekly. To be fowarding something!

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K