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Which startups are investors hunting for: details about the latest release of Y Combinator — who received the investment and what trends in venture capital investment does this reflect?

Friday, December 3, 2021

Startup Jedi

We talk to startups and investors, you get the value.

In the summer of 2021, the next stream of the world-famous accelerator Y Combinator ended. In the post-pandemic reality, the entire acceleration program for founders was conducted online, including Demo Day, in which 377 startups took part. And even in the online format, this is still an event that venture investors and startup founders from all over the world follow: after all, the "distribution of investments" in Y Combinator reflects (and even in some way sets) the trends of venture investment, then spreading around the world. 

We will tell who was given money, what conclusions we can draw, and also why investors from all over the world focus on the pattern of a successful startup.

Y Combinator as an indicator of the venture industry

During the time of the Y Combinator accelerator, an entire epoch has changed. In 2005 he was the first incubator of startups: it collected founders «in the kitchen» every week, literally coming up with the rules by which other similar accelerators will function.

Now, 16 years later, the term «startup» knows everyone from small to big, and it is not the fate of pioneers from the IT industry, but a huge and perhaps the most profitable direction in business. Accelerators are not what they are in every country —  every city and university. It’s hard to say how much the amount of venture capital investment has increased in the meantime.

Nevertheless, in this new startup world, Y Combinator is still the number one accelerator. Dozens (if not hundreds of thousands) of startups from all over the world are trying to get here, and those who get in come out not only with invaluable experience, but also with solid offers from investors.

Y Combinator is a relevant indicator of trends in the startup industry: analysts and experts from all over the world pay close attention each year to which startups enter the accelerator, to whom investment is given on DemoDay, and who receives the best offers.What for? To understand what parameters the world's leading funds are guided by, how they choose startups for investments and what their choice is based on. DemoDay in Y Combinator sets a pattern, according to which funds and business angels around the world then make investment decisions.

How investors determine the object for a successful transaction

There is a stable expression in investor circles — it's all about pattern matching. What is it about? There is a certain pattern of a successful transaction — a set of parameters that correspond to companies that are more likely to become a successful investment object in the future and bring profit to investors.

Of course, having these parameters is no guarantee of success: otherwise the venture business would not be so risky. Patterns change over time, but it is safe to say that a large proportion of investors from around the world rely on them to make decisions.

And this is logical: when there is only a pitch of founders and there is no knowledge of each startup from the inside, it is very  hard to make a decision "from scratch" every time — will there be success? A "template" is needed for making decisions that can be oriented. 

So, what parameters in a startup correspond to the pattern of a successful transaction? 

Experienced founders: they are either already serial entrepreneurs with experience in launching startups, or have experience in a well-known technology company and have deep expertise on the problem that their product solves. 

A large-scale problem: investors are looking at startups that solve a global problem at the expense of their product or offer innovative technology that will help solve such a problem; also in the focus of attention are those startups that transfer an already existing successful solution to a new market.  

Metrics: Companies that are already in the current round are «mature», that means that they have high rates of earnings close to the next round and have a good chance to invest; companies that are gathering an unusually large round are also interesting. 

Of course, this does not mean that companies founded by yesterday's students in a non-standard market have no chance. After all, we know many examples when exactly such companies became "unicorns"! Nevertheless, there is a pattern of successful investment, and it is worth considering. 

Let's now look at the companies that received investments in Y Combinator this summer: do they reflect this pattern?

Who received investments in Y Combinator

Let's take a few companies that received investments on Demo Day with the so-called oversubscription (investors are ready to give more than the company requested). 

Alchemy is a no-code tool designed to create the design of online stores. The founders are graduates of the University of California at Berkeley, previously working at Uber and Yelp.

Conclusion: there is a global problem, there is experience working in a well-known startup.

Akudo is a startup from India, creating a bank for teenagers.With help of which, they can develop their financial literacy, make their first transactions with money, and parents can either  help them and control the process. The founders have experience working at the first digital bank in the USA, Capital One.

Conclusion: once again, work experience in a large startup + in-depth expertise, and also —  the transfer of a proven solution to a giant market.

BrightReps is a startup that helps to organize work in a user support team more effectively. The product already has customers - Fortune 500 companies and large income. 

Conclusion: the global market + a mature startup for its round.

Dots — the company offers a business solution in the field of communication management with customers and employees. The startup operates in the community management segment — a new market that is growing rapidly. The founders have a solid background: they studied at Princeton and worked at McKinsey. 

Conclusion: a global problem + work experience in a world-famous company and deep expertise.

Karbon Card —  this startup represents the transfer of an already existing solution —  corporate banking —  to the Indian market. The founders have experience in launching startups and working in large companies.

Conclusion: transfer of a successful solution to a new market + suitable experience of the founders.

Whalesync — the service helps to synchronize client data from such no-code tools as Notion and Mailchimp. The project's founder worked for Microsoft and Google, then founded a startup and sold it to the same Google

Conclusion: a global problem + the founder's experience.

What trends in venture investments does the new issue of Y Combinator talk about?
  • Investors prefer certain niches. Now the most common destinations are food delivery, EdTech, no-code, MedTech, cryptocurrencies, FinTech and insurance, bots, and the space industry.

  • Venture funds and business angels tend to be extreme. They are willingly invested either in very proven options (transfer of technology to a new market, experienced founders, etc.) or in radical new technology that can «shoot». But in the second version, of course, they no longer rely on rational analysis but on their own instincts.  

  • The most attractive products for venture capital are those aimed at rapidly developing promising markets. Among them are the previously named India, Latin America and Africa.  

  • The amount of financing of companies at early stages is increasing. Here, the trend is set by the world's leading venture funds. Usually, the volume of the early investment fund at the Seed stage is $50-100M, but this year Sequoia and Andreessen Horowitz launched their funds of $400M or more.

Total investment in startups is growing at an insane rate every year —   and that is good. But at the same time, there are more and more applicants for this investment, and certainly not just accelerator graduates. It is useful to know the parameters that investors are guided by when making decisions on a transaction: it is much easier to understand where to direct your idea (and your team). Let’s see what Y Combinator will surprise us in a year!

3 Dec 2021

 

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