Y Combinator Doubles Down on Crypto Founders Despite Market Volatility • TechCrunch

Crypto entrepreneurs have heard the saying a thousand times in the last few months – there is no better time to build than during a downturn. IY Combinator’s latest cohort is 30 crypto startups, up from 25 in the previous batch; shows that the gas pedal, and the entrepreneurs it relies on, believe in the saying.

YC appeared to be further tweaking crypto itself when it trimmed its overall batch size this summer. Doing some quick math, crypto startups make up 13% of companies in this summer’s YC cohort, while crypto only made up 6% of the previous W22 YC batch, meaning the percentage of crypto companies participating in the accelerator’s program more than doubled in just a few months.

YC’s vote is welcome news for a sector experiencing its own volatility. Data from Crunchbase and PitchBook indicate that the total dollar value of web3 investment could drop by half or more next quarter from previous levels, which hovered around $10 billion in some recent quarters, a TechCrunch+ analysis reports.

The accelerator’s recently grown standard check size can 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.

By and large, the early world continues to be a sunny respite from the doom and gloom of technology more generally. For example, YC is betting more and more on crypto entrepreneurs as off-yet-adjacent operations do the same. Earlier this month, Y Combinator alumni effort OrangeDAO raised $80 million to support crypto startups and bring more YC entrepreneurs into the crypto world. Add the fact that there is an alumni day dedicated to giving former accelerator participants a first look at the fresh talent coming out of YC, and the synergies are self-explanatory.

With these factors in mind, let’s see what this batch of YC crypto founders prioritize in terms of fresh capital and volatility.

Clumsy, confusing consumers

The “crypto winter” that began unfolding in May this year highlighted some major issues with the sector and seems to have inspired founders to build better solutions in the space. This year’s batch honed in on a few areas of focus, one of the most notable being security – a clear area of ​​vulnerability within the wider ecosystem that became even more prominent after this year’s rise in crypto hacks and phishing attacks.

This season’s cohort embodies another distinctive feature of the web3 space – both front-end and back-end in this sector are being built at the same time. 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 building out the plumbing behind the scenes in the cryptoverse.

Consumer-facing wallets seem to be a big area of ​​focus this year, perhaps in part in response to the common criticism that web3 products are clunky and confusing for everyday users. Each of the four startups in this batch building of crypto wallets has its own niche. For example, Paris-based Bitstack is building a crypto wallet tailored for Europeans, San Francisco’s Sylva is capitalizing on the growing popularity of staking to allow users to earn interest across different blockchains, and Stackup aims to be the easiest-to-use wallet for beginners.

Even outside of wallets, there is a clear focus on consumer-facing products in this group, with startups Internet Friends and SolStack both looking to capitalize on the growing demand for community and group-based investments. Lyra helps individuals spend crypto with the 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 in the web3. For example, of the 30 crypto companies in this group, 10 of them are focused on SaaS products, underscoring the desire for startups to find ways to serve institutional clients.

While the end user is less risky when it comes to building for the enterprise, the competition is tough. One batch startup, Alterya, wants to be the groomer for crypto, helping apps extract user financial data to make transactions easier. Nevertheless, Plaid and Gemini, a digital asset cryptocurrency exchange, 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 companies detect and prevent crypto fraud, a focus that all major crypto exchanges have today and a problem that PayPal, Coinbase, and Mastercard have solved acquisition.

The growing demand for crypto-security solutions goes hand-in-hand with growing interest in decentralized finance (DeFi), an area filled with institutional interest but particularly vulnerable to high-profile mishaps due to its inception, such as the one we saw with the collapse of the Terra stablecoin earlier this fall .

DeFi in particular is seen as the sub-sector of crypto that started the broader decline in the sector. After Terra collapsed, other DeFi protocols began to emerge, including Celsius and Voyager, illustrating how intertwined crypto-companies are and how this affiliation already poses high risks. But despite the high risk associated with DeFi, the promise of high returns for investors through activities like staking has kept it afloat, with major exchanges including Coinbase increasingly relying on activities like staking for revenue like other parts of the business mind.

Of the 30 crypto companies in this cohort, 8 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 the traditional financial world, such as derivatives, which happens to be the focus of India-founded EthosX in this group.

Other YC S22 startups in the DeFi space include crypto-treasury management platform Excheqr and institutional trading platform Terrace, both of which are also seeking to fill the growing demand from companies to take advantage of high DeFi returns.

NFTs are still an asset

The fintech-related innovation in the web3 world is not only limited to DeFi products that directly generate returns. NFTs saw growing interest from investors during the crypto bull, and while NFT exchanges have been through a particularly severe decline in trading activity and interest in recent months, YC has a strong track record in this area. It supported the largest NFT marketplace, OpenSea, in 2018.

In the last YC cohort, NFT startups were prominent in the mix of crypto startups, with six in total included. This group YC continues to invest in NFTs despite current market sentiment, backing 7 new companies in the subsector, including secure coin marketplace Supercool and web3 gaming focused NFT startup Metafi.

Among the YC NFT startups this group, we also see familiar nods to other much-discussed topics in the crypto world, including the creator economy, developer tools, and consumer payments.

As unpredictable as crypto has proven itself to be, perhaps the ups and downs of the past year, combined with funding and support from YC, are just what these early founders needed to be able to work on fixing the most pervasive problems in the space. This year’s cohort may end up embodying another oft-repeated bit of web3 wisdom – that a downturn will separate the startups with strong fundamentals from those driven by just the word “blockchain” rather than their business models.