The founders of crypto have heard the saying a thousand times over the past few months – there’s no better time to build than in a downturn. In the latest cohort of Y Combinator, there are 30 crypto startups, up from 25 in the previous batch; showing that the accelerator, and the founders it bets on, believe in the adage.
Additionally, YC appeared to refine the crypto even further even as it reduced its overall lot size this summer. Doing some quick math, crypto startups make up 13% of companies in this summer’s YC cohort, while crypto was just 6% in the previous W22 YC batch, meaning that the percentage share of crypto companies participating in the accelerator program has more than doubled in just a few months.
YC’s vote is good news for a sector that is experiencing its own volatility. Data from Crunchbase and PitchBook indicate that the total dollar value of Web3 investments could drop by half or more in the next quarter from its previous levels, which hovered around $10 billion in some recent quarters, according to an analysis from TechCrunch+.
The throttle’s recently developed standard control size could be particularly useful here. YC now invests $500,000 in each accepted startup, money that ideally goes further (and makes more of a statement) during a downturn than in a frothy market.
Overall, the debut world continues to be a sunny respite from the pessimism and gloom surrounding technology more broadly. For example, YC is increasingly betting on crypto founders as outside but adjacent operations do the same. Earlier this month, Y Combinator alumni effort OrangeDAO raised $80 million to support crypto startups and bring more YC founders into the crypto world. Add to that that there’s a dedicated alumni day to give former Accelerator participants a first look at the new talent coming out of YC, and the synergies are self-explanatory.
With these factors in mind, let’s see what the YC crypto founders of this lot are prioritizing with fresh capital and instability in mind.
Clumsy and confusing consumers
The “crypto winter” that began rolling out in May this year has highlighted some major industry issues and appears to have inspired the founders to create better solutions in the space. This year’s batch focused on a few areas of focus, one of the most notable being security – a clear area of vulnerability within the wider ecosystem that has become even more important after the increase in cryptographic hacks and phishing attacks this year.
This season’s cohort embodies another quirk of the web3 space – the front-end and back-end of this sector are being built simultaneously. There are a number of startups in the cohort that are working to make crypto more developer and end-user friendly, as well as a range of different infrastructure-focused companies that are building the plumbing behind the scenes for the cryptoverse.
Consumer-facing wallets appear to be a major area of focus this year, perhaps partly in response to the common criticism that Web3 products are clunky and confusing for everyday users. Each of the four startups in this crypto wallet building batch has its own niche. For example, Paris-based Bitstack is building a European-friendly crypto wallet, San Francisco’s Sylva is leveraging the growing popularity of staking to allow users to earn interest across different blockchains, and Stackup aims to be the wallet. easiest to use for beginners. .
Even outside of wallets, the focus is clearly on consumer-facing products in this batch, with internet startups Friends and SolStack both looking to capitalize on the growing demand for community and group investments. Lyra helps individuals spend their crypto with its virtual card, while Weltio helps them invest in the asset class.
Not all startups hope to serve the consumer directly. Especially as institutions continue to enter the crypto space, the market downturn has given even greater impetus to founders to prioritize building the technology and tools that more traditional players need. to feel comfortable operating on the web3. For example, of the 30 crypto companies in this cohort, 10 of them are focused on SaaS products, underscoring the desire of startups to find ways to serve institutional clients.
Although the end user is less risky when it comes to building for the company, the competition is tough. A batch startup, Alterya, wants to be the Plaid for crypto, helping apps mine user financial data to facilitate transactions. Yet Plaid and Gemini, a cryptocurrency exchange for digital assets, announced a partnership in July 2022 with a similar pitch. There’s also Chainsight, a batch startup building an API to help web2 and web3 businesses detect and prevent crypto scams, a goal every major crypto exchange has today and a problem PayPal, Coinbase, and Mastercard have. resolved through acquisitions.
The growing demand for crypto security solutions goes hand in hand with a growing interest in decentralized finance (DeFi), a space rife with institutional interest but particularly vulnerable to high-profile mishaps due to its nascent nature, such as what we saw with the collapse of the stablecoin Terra earlier this fall.
DeFi in particular is seen as the crypto sub-sector that triggered the broader industry downturn. After the collapse of Terra, other DeFi protocols began to unravel, including Celsius and Voyager, illustrating how intertwined crypto companies are and how this connectivity is already compounding high risk. But despite the high risks associated with DeFi, its promise of high returns for investors through activities such as staking has kept it afloat, with major exchanges, including Coinbase, increasingly reliant on activities such as staking to generate revenue like other parts of its business pipeline.
Of the 30 crypto companies in this cohort, 8 are creating products specifically focused on DeFi. The DeFi market is maturing, bringing with it new offerings similar to those that have evolved over time in the world of traditional finance, such as derivatives, which happen to be at the center of Indian company EthosX in this batch.
Other YC S22 startups in the DeFi space include crypto cash management platform Excheqr and institutional-grade trading platform Terrace, which are also looking to meet growing corporate demand to take advantage of high yields from Challenge.
NFTs are always an asset
Fintech-related innovation in the web3 world is not limited to DeFi products that directly generate returns. NFTs have attracted increasing interest from investors during the crypto bull run, and although NFT exchanges have suffered a particularly severe downturn in trading activity and interest over the past few months, YC has a strong track record in this space. It supported the largest NFT marketplace, OpenSea, in 2018.
In the latest YC cohort, NFT startups featured prominently in the crypto startup mix, with six in total included. This batch, YC continues to invest in NFTs despite current market sentiment, backing 7 new ventures into the subsector, including secure typing marketplace Supercool and web3 gaming-focused NFT startup Metafi.
Among the YC NFT startups in this batch, we also see familiar nods to other widely discussed topics in the crypto world, including the creator economy, developer tools, and consumer payments.
As unpredictable as crypto has proven itself, perhaps the ups and downs of the past year, combined with funding and support from YC, are just what these fledgling founders needed so they could focus on solving. of the most common problems in space. . This year’s cohort may end up embodying another oft-repeated Web3 wisdom – that a downturn will separate startups with strong fundamentals from those backed simply by the word “blockchain” rather than their business models.