Crypto founders have I’ve heard the saying a thousand times over the last few months – there’s no better time to build than during a downturn. There are 30 crypto startups in Y Combinator’s latest cohort, up from 25 last year, showing that the accelerator and the founders it relies on believe in the adage.
Additionally, YC seemed to be refining crypto even further, despite reducing its overall stack size this summer. If you do a quick math, crypto startups make up 13% of the companies in this summer’s YC cohort, while crypto made up just 6% of the previous W22 YC batch, meaning the percentage of crypto companies running on Accelerator program participation has doubled in just over a few months.
YC’s vote of confidence is welcome news for a sector that has itself been beset by volatility. Data from Crunchbase and PitchBook suggests that the total dollar value of web3 investments could fall by half or more in the next quarter from its previous level, which has hovered around $10 billion in some recent quarters, reports TechCrunch+ analysis .
The new standard check size of the accelerator could be particularly helpful here. YC is now investing $500,000 in each accepted startup, money that ideally stretches further (and has more meaning) during a downturn than it does in a bubbly market.
By and large, the early stage world continues to be a sunny respite from the doom and darkness that surrounds technology more broadly. For example, YC is increasingly betting on crypto founders as operations outside yet alongside it are doing the same thing. Earlier this month, Y Combinator’s alumni effort, Orange DAO, raised $80 million to support crypto startups and bring more YC founders into the crypto world. Add that there is an alumni day giving 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 stack prioritize in terms of fresh capital and instability.
Clumsy apps, confused consumers are the status quo of crypto
The “crypto winter” that started in May this year has highlighted some major issues in the industry and seems to have inspired the founders to come up with better solutions in this space. This year’s stack focused on a few focus areas, one of the most notable being security — a clear area of vulnerability within the broader ecosystem that became even more apparent after this year’s surge in crypto hacks and phishing attacks.
This season’s cohort embodies another distinctive feature of the Web3 space – both the front-end and back-end in this sector are being built simultaneously. There are a number of startups in the cohort working to make crypto more user-friendly for both developers and end-users, as well as a number of different infrastructure-focused companies working behind the scenes of the cryptoverse.
Consumer-focused wallets appear to be a major focus this year, perhaps in part in response to widespread criticism that web3 products are clunky and confusing for everyday users. Each of the four startups in this batch building crypto wallets has their own niche. For example, Paris-based Bitstack is building a crypto wallet tailored for Europeans, San Francisco-based Sylva is capitalizing on the growing popularity of staking to allow users to earn interest across different blockchains, and Stackup aims to provide the easiest wallet to use for beginners.
Outside of wallets, too, there’s a clear focus in this stack on consumer-facing products, with startups Internet Friends and SolStar both looking to capitalize on growing demand for community and group-based investing. Lyra helps individuals spend their cryptos using their virtual card, while Weltio helps them invest in the asset class.
Not all startups hope to serve the consumer directly. In particular, as institutions continue to enter the crypto space, the market downturn has given founders an even greater impetus to prioritize the development of technologies and tools that more traditional players need to thrive on the Web3. For example, out of the 30 crypto companies in this cohort, 10 are focused on SaaS products, underscoring the desire of startups to find ways to serve institutional customers.
While the end user is less risky in building for the company, the competition is fierce. A batch startup, Alterya, wants to be the plaid for crypto, helping apps extract users’ financial data to facilitate transactions. But Plaid and Gemini, a cryptocurrency exchange for digital assets, announced a partnership with a similar pitch in July 2022. There’s also Chainsight, a batch startup that’s building an API to help Web2 and Web3 businesses detect and prevent crypto scams, a focus every major crypto exchange has today and a problem , which PayPal, Coinbase and Mastercard have tackled through acquisitions.
The growing demand for crypto security solutions has come hand-in-hand with a rising interest in decentralized finance (DeFi), a space teeming with institutional interests but its emergence making it particularly vulnerable to high-profile glitches like the ones we saw in the collapse of the Terra stablecoin earlier this fall.
DeFi in particular is seen as the sub-sector of crypto that started the broader downturn in this sector. After Terra’s collapse, other DeFi protocols began to unravel, including Celsius and Voyager, showing how intertwined crypto companies are and how this connectedness adds to the already high level of risk. But despite the high risks associated with DeFi, the promise of high returns for investors through activities like staking has kept it afloat, with major exchanges, including Coinbase, becoming increasingly dependent on activities like revenue staking as other parts of its business tank are.
Of the 30 crypto companies in this cohort, eight are building products specifically focused on DeFi. The DeFi market is maturing, bringing with it new offerings similar to those that have evolved over time in traditional finance, such as: B. Derivatives, which happen to be the focus of India-founded EthosX in this stack.
Other YC S22 startups in the DeFi space include crypto treasury management platform Excheqr and institutional trading platform Terrace, both of which aim to meet growing corporate demand for high DeFi yields.
NFTs are still an asset
Fintech-related innovation in the Web3 world is not limited to DeFi products that directly generate income. NFTs have seen growing interest from investors during the crypto bull run, and while NFT exchanges have weathered a particularly sharp drop in trading activity and interest in recent months, YC has a strong track record in this space. It supported the largest NFT marketplace OpenSea in 2018.
In the last YC cohort, NFT startups featured prominently in the mix of crypto startups, including six in total. In this batch, YC continues to invest in NFTs despite the current market sentiment, backing seven new companies in the sub-sector, including secure minting marketplace Supercool and Web3 gaming-focused NFT startup Metafi.
Among the YC NFT startups in this stack, we also see familiar nods to other hotly debated topics in the crypto world, including the creator economy, developer tools, and consumer payments.
As unpredictable as crypto has proven, perhaps the ups and downs of the past year, combined with YC’s funding and support, are just what these early-stage founders needed to focus on solving the most pervasive problems in the space to concentrate . This year’s cohort may end up embodying another much-repeated Web3 wisdom – that a downturn will separate those startups with strong fundamentals from those that are backed only by the word “blockchain” and not their business models.