What Midterm Madness Means for Startups • TechCrunch

Welcome to Startups Weekly, a sneak peek at this week’s startup news and trends. To get this in your inbox, Register here.

Hey guys. it is. Kyle, filling out this issue for Natasha, taking a much-needed break from the news cycle (and the scene that is Twitter). While it’s my first Startups Weekly column, you’ve probably seen me here and there on TC covering mostly venture, AI, and enterprise-related stuff. This week’s roundup of startup news is interesting — in part because it doesn’t center around Musk’s shenanigans.

But before we wrap up the weekend together, let’s take a look at the week marked by America’s midterm elections.

As ugly and stressful as the US election cycle is, the results always have big implications for the tech industry. As the US pulls out of China, US-based chipmakers are hoping for relief. Crypto businesses are anticipating regulations to establish safeguards and address legal issues for so-called stablecoins. And the big tech companies are backing a possible last-ditch effort by the White House to pass antitrust legislation — a post-medieval political climate, of course.

It remains to be seen how serious the damage is. The sanctions, along with supply chain restrictions and price hikes, threaten to disrupt the stateside chipmaking industry — one chip maker Lam Research predicts will lose as much as $2.5 billion in revenue next year due to the new trade rules. If passed, the antitrust bills could severely limit the ability of Amazon, Meta, Microsoft and other technology incumbents to find and punish rivals to improve their products and services.

Unsurprisingly, the industry is on track for the 2022 mid-term, rated by top donors. Google, Amazon, Meta and their trade groups have poured nearly $100 million into trying to thwart antitrust laws — and their backers. Meanwhile, according to a Washington Post analysis, FTX CEOs Sam Bankman-Fried, Larry Ellison and Peter Thiel have given tens of millions of dollars to their campaigns and wielded a high-tech influence in an acerbic field.

It is debatable whether the industry has succeeded in securing a bright biennial opportunity for itself.

With the exception of sectors with bipartisan support, such as defense, startups are likely to suffer the most from this politically divided stretch — particularly in the chip manufacturing, green and crypto businesses. At least one study found that congressional gridlock contributes to income inequality, and another shows that political disagreements have a greater negative impact on company innovation than government policies.

Consider what a recession might look like. If Congress is slow to act (as it often is with divided branches), the federal government may spend less on social safety net programs, leading to a sluggish recovery. There is also the prospect of a debt ceiling dispute, which could be particularly damaging. The U.S. lost its perfect AAA credit rating from Standard & Poor’s in August 2011 as a result of the debt ceiling debate during President Barack Obama’s first term, causing the stock market to fall more than 5 percent.

In a note to investors, Morgan Stanley predicted that the current division in Congress means that fiscal expansion will react in the opposite direction to moves over the next two years.

Of course, partisan gridlock doesn’t have to be an entirely bad thing when it comes to the economy — or startups. According to data from Edelman Financial Engineers, reported by CNN Business, the S&P 500 has returned 16.9% annually since 1948, when a Democrat was in the White House and Republicans held majorities in both houses of Congress. That’s compared to 15.1% during years of full Democratic control and 15.9% during years of unified GOP government.

A silver lining, but a relatively weak one, really.

The rest of this newsletter is less than minimal, I promise! — We talk about Twitter’s runaway user base, the rise of generative AI, and the enduring VC appeal of e-commerce. For more content along those lines, give me a follow-up @Kyle_L_Wiggers (Awaiting Mastodon Migration) on Twitter.

Twitter’s loss is its competitors’ gain.

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 Musk-led rule change, including the accounts of high-profile comedians. Then on Tuesday, a report from platformer Casey Newton suggested that Musk is considering putting all of Twitter behind a paywall. Aik

The unexpected policymaking has begun to worry consumers, some of whom are moving to what they see as greener pastures. That’s an advantage for startups like Mastodon, a German-based platform that offers an experience that rivals Twitter in many ways. (Read my colleague Amanda Seiberling’s piece on the basics of Mastodon’s history, how it works and how to join it, who does a thorough job of breaking it all down.)

Here’s why it’s important: Mastodon has experienced rapid growth since Elon Musk took over Twitter, with nearly half a million users joining the network as of October 27. While the company is not for profit, the expansion could spur Twitter’s rivals out of the ashes — and VC for those rivals. Former Google Area 120 director Gabor Seele is one of the opportunists. Announcement On Monday, it received interest (and capital hopes) from investors and a former Twitter executive to build a Twitter alternative.

Image Credits: Bryce Durbin / TechCrunch

AI generates.

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’s DALL-E 2 and Stability AI’s Stable Diffusion. Stability AI recently raised more than $1 billion in a reported $101 million valuation, and OpenAI is said to be in talks to raise nearly $20 billion from Microsoft and other backers.

Deeply erotic film and AI-generated art contest entries may be dominating the headlines. But investors see great potential in the generative AI built for the firm. TechCrunch’s Rita Liao this week covered Movio , a two-year-old startup using AI to create videos featuring talking human avatars along with other AI frameworks. A little earlier in the fall, I wrote about Jasper, an AI content platform for marketing, which raised $125 million at a $1.5 billion valuation.

Here’s why it’s important: VCs are increasingly on generative AI. In a recent post on its website, VC firm Sequoia explained that generated AI — any AI that can generate text, photos, audio or video — has the potential to “generate trillions of dollars in economic value.” Trillions may sound like an optimistic prospect, but it’s proven that LP’s willingness to write checks is fueling an explosion of innovation in a fledgling space.

Stable distribution

Image Credits: Bryce Durbin / TechCrunch

From home exercise to home decoration

What has Peloton founder John Foley been up to since leaving the company in September? Being something of a carpet salesman, apparently. Truly. My colleague Rebecca Szkutak profiles Foley’s latest TC+ work, Ernesta . Aiming to launch in the spring of 2023, Ernesta — backed by $25 million in venture capital — will sell custom carpets direct-to-consumer (DTC).

Here’s why it’s important: Rugs can look random online. But Ernesta’s quick acquisition of a large unit points to continued investor enthusiasm around e-commerce — even with many eyes on DTC. The U.S. Census Bureau’s annual retail survey found that digital sales of goods rose from $671.2 billion in 2020 to $815.4 billion in 2020 as the pandemic overwhelmed online shopping. Regarding DTC, high profiles like Casper, Brandless and Outdoor Voices have given some VCs pause to be sure. But as Ernesta’s success shows, the money hasn’t dried up yet. The rag company joins Rad Power Bicycles, Madison Reed and Glossier among DTC brands with tens of millions in equity at high valuation levels.

Image Credits: Cavan Images / Getty Images

A few notes

  • If you missed last week’s newsletter, read it here: Tweep’s Twitter.
  • TechCrunch is going to Miami next week for, you guessed it, a crypto conference. Some of my absolute favorite people are going to be there, including our all-star crypto team, so make sure you go and DM me for a sweet, sweet discount code. Buy tickets and check out our lineup here.
  • Are you lost Natasha? Not to worry, she’ll be back next week to write the weekly edition of Beginners. take care!

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Got a story tip? Feel free to hit my inbox. These days, I’m particularly interested in generative AI, so if you’re working on something weird for it, don’t be weird.


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