Y Combinator is increasing its investments in crypto founders despite the volatile market

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There is no better time to create than during a slump, a phrase that cryptocurrency innovators have heard a thousand times over the previous six months. There are 30 cryptocurrency firms in the most recent cohort of Y Combinator, up from 25 in the batch before, demonstrating that the accelerator and the founders it is placing their bets on, believe in the saying. Furthermore, even as it reduced the size of its total batch this summer, YC appeared to focus even more on cryptocurrency. The ratio of crypto businesses participating in the accelerator’s program has more than quadrupled in only a few months, accounting for 13% of the companies in this summer’s YC cohort as opposed to only 6% of the companies in the prior W22 YC batch.

The endorsement of YC is encouraging for an industry that is already suffering turbulence. According to data from Crunchbase and PitchBook, the overall dollar worth of web3 investments could decrease in the upcoming quarter from its previous levels, which were about $10 billion in some recent quarters, by half or more, according to a TechCrunch+ analysis.

The recently increased standard check size of the accelerator may be extremely useful in this situation. Each selected firm now receives a $500,000 investment from YC, money that should go further (and make a bigger impression) in a downturn than in a booming market. In general, the early-stage market continues to provide a bright contrast to the general melancholy surrounding technology.

For instance, YC is investing on cryptocurrency founders more and more frequently while operations outside of it but close by do the same. Orange DAO, a project led by Y Combinator alumni, received $80 million earlier this month to support cryptocurrency firms and attract more YC founders to the space. The synergies become clearer when you consider that there is an alumni day intended to give past accelerator participants a first peek at the new talent emerging from YC.

Let’s look at what the YC crypto founders in this class are prioritizing with regard to new funding and market volatility after considering these issues.

Hard to use apps and confused users are the norm in the crypto industry

The “crypto winter,” which started in May of this year, brought to light several significant problems with the industry and appears to have motivated creators to create better solutions. The most significant area of attention for this year’s batch was security, which is an obvious area of vulnerability in the larger ecosystem and has become even more so as a result of this year’s increase in cryptocurrency hacks and phishing assaults.

This season’s cohort exemplifies another peculiarity of the web3 industry: in this industry, both the front end and back end are being constructed concurrently. In the cohort, there are a number of firms attempting to improve the usability of cryptocurrencies for both developers and end users, as well as numerous infrastructure-focused businesses developing the back-end infrastructure of the crypto-verse.

Consumer-facing wallets appear to be a big area of concentration this year, possibly in reaction to the frequent complaint that web3 solutions are cumbersome and difficult for regular consumers to understand. The four firms in this batch that are creating crypto wallets each have a distinct market. For instance, San Francisco’s Sylva is utilizing the rising popularity of staking to allow users to earn interest across many blockchains, while Paris-based Bitstack is developing a cryptocurrency wallet just for Europeans. Stackup wants to be the most user-friendly wallet for beginners.

Even outside of wallets, this collection of firms has a distinct preference for consumer-facing goods, with Internet Friends and SolStar both hoping to take advantage of the expanding market for community and group-based investing. With its virtual card, Lyra enables users to spend their cryptocurrency, while Weltio enables them to invest in the asset class.

Not all startups aim to provide services to customers directly. The market slump has given founders an even greater incentive to focus on developing the technology and capabilities that more traditional players need to feel comfortable operating in web3, especially as institutions continue to enter the crypto industry. Ten of the 30 crypto businesses in this cohort, for instance, are primarily focused on SaaS offerings, demonstrating the desire of startups to develop methods to cater to institutional clients.

Building for the end user is less riskier than building for the corporation, but there is fierce rivalry. Alterya, a batch company, aims to be the Plaid of cryptocurrency by assisting apps in extracting users’ financial data to facilitate transactions. A similar pitch was used to promote a cooperation between Plaid and Gemini, a cryptocurrency exchange for digital assets, in July 2022. Additionally, every major cryptocurrency exchange today focuses on Chainsight, a small startup that is developing an API to aid web2 and web3 organizations in detecting and preventing crypto scams. PayPal, Coinbase, and Mastercard have all made acquisitions to address this issue.

The rising interest in decentralized finance (DeFi), a field ripe with institutional interest but particularly prone to high-profile mishaps due to its infancy, as we saw with the collapse of the Terra stablecoin earlier this fall, goes hand in hand with the rising demand for crypto security solutions.

DeFi in particular is thought to have been the crypto segment that started the overall collapse in the industry. Other DeFi protocols, such Celsius and Voyager, started to fail after Terra failed, showing how linked the cryptocurrency industry is and how the connectedness increases already high risk. DeFi has been able to stay alive despite the significant risks involved because of its promise of big returns for investors through practices like staking. Important exchanges like Coinbase are increasingly reliant on practices like staking for revenue when other aspects of their operations fail.
Eight of the 30 cryptocurrency businesses in this cohort are developing solutions exclusively for DeFi. Derivatives, which happen to be the area of interest for India-founded EthosX in this batch, are examples of new offers that have emerged as the DeFi sector has matured. These offerings are comparable to those that have developed over time in the traditional financial world.

Excheqr, a cryptocurrency treasury management tool, and Terrace, an institutional-grade trading platform, are two more YC S22 startups in the DeFi field that aim to meet the escalating demand from businesses to benefit from high DeFi returns.

NFTs continue to be a good investment

The development of fintech-related products in the web3 environment is not just limited to DeFi solutions that produce yield immediately. During the cryptocurrency bull run, investors’ interest in NFTs grew. YC has a solid track record in this industry, despite the fact that NFT exchanges have recently experienced a particularly severe decline in trading volume and investor interest. In 2018, it supported OpenSea, the largest NFT marketplace.

Six NFT businesses made up the majority of the cryptocurrency startups in the previous YC batch. YC is supporting seven new NFT startups in this batch, including web3 gaming-focused NFT firm Metafi and secure minting marketplace Supercool, despite the present market climate. We also notice recognizable allusions to other hotly debated topics in the crypto industry, such as the creator economy, developer tooling, and consumer payments, among the YC NFT firms in this batch.

Perhaps the ups and downs of the previous year, together with investment and support from YC, were exactly what these early-stage companies needed to be able to focus on resolving the most widespread concerns in the industry, given how unpredictable crypto has shown to be. Another piece of common web3 wisdom is that a downturn will separate the firms with solid foundations from those who are buoyed solely by the phrase “blockchain” rather than their business plans. This year’s cohort may wind up embodying this idea.

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