July 20, 2024
Y Combinator removes Indian startup from batch over 'irregularities'

Brazilian startup Salvy, a mobile carrier for businesses, was the only company based in Latin America in Y Combinator’s latest batch, the accelerator confirmed to TechCrunch.

That’s a significant drop compared to cohorts that went through the accelerator during COVID when it was remote, but also more recent classes: There were 33 Latin American companies in Y Combinator’s Winter 2022 batch, 16 in summer 2022 and 10 in winter 2023.

One caveat to the stark Winter 2024 group data point is that the directory is not exhaustive; some companies prefer to remain in stealth mode. But that doesn’t explain the steady and now seemingly complete decline of Latin American startups in the company’s startup cohorts, and neither does the fact that Y Combinator post-pandemic batches are smaller and in-person again. In fact, you’d have to go back to summer 2015 to find a group with just a single Latin American participant.

The accelerator also cut down on efforts it previously made to incentivize startups to apply, such as the global outreach tours that once included stops in Brazil, Colombia or Mexico. The last such tour took place in 2022, and it was virtual, TechCrunch learned. It is one of several things that changed at YC since 2022 and its return to in-person batches.

Says Cristóbal Griffero, whose startup Fintoc was part of YC’s W21 cohort: “The number of YC deals has decreased overall, not just in Latin America. But if we consider that about 8% of the companies were from the region in the W22 batch, versus the current one where the region represents less than 1%, it becomes clear that Latin America is being disproportionately affected.”

Unpacking what’s at play is a worthy exercise for what it says of 2024 Y Combinator, but also of the state of LatAm startups more broadly, and where the Rappis of tomorrow could fit in.

Yesterday’s flavor?

YC declined to comment; but by now, we know its team always says it funds founders, not ideas. In other words, it doesn’t think in terms of startup categories. Still, its batches typically reveal a lot about what’s in fashion among entrepreneurs and investors. This year, it’s clearly AI.

With nearly double the number from the Winter 2023 batch and close to triple the number from Winter 2021, AI startups dominated at Y Combinator’s Winter 2024 Demo Day, my colleague Kyle Wiggers noted.

On the other hand, fintech representation has shrunk compared to previous batches: Only 8% of YC’s latest batch is listed as fintech in its director, compared to 24% in the winter of 2022. Historically, around one third of the 231 Latin American companies that went through YC focused on fintech.

These data points could explain in big part why Latin American startups are less present in this batch. In a region with a strong need for better financial inclusion, fintech has long been a sector that entrepreneurs have loved to tackle. In contrast, deep tech companies represent only 10% of the Latin American and Caribbean startup ecosystem.

Deep tech and fintech aren’t mutually exclusive; AI-enabled fraud detection, for instance, would fall under both categories. But an AI-hungry YC would still be less aligned with Latin America’s tech scene.

It’s not just AI, though; it’s YC’s take on AI that makes it even more geographically challenging. Out of the 89 AI startups in its latest batch, 73 were based in the U.S. and Canada, 3 in Europe, and 26 remote. So much for the Paris AI buzz.

Maybe the French AI scene is overhyped. But judging by the number of Demo Day pitchers with French accents, YC isn’t backing fewer European founders than in previous years, where France was quite well represented. Only this time, maybe they aren’t based in Europe — only 13 batch participants are, according to YC’s directory.

Despite its virtual programs, YC has really been a Bay Area-based program for most of its 15 years. And in a conversation between longtimes YC partners Dalton Caldwell, and Michael Seibel, Seibel conceded that startups can still “win” elsewhere but argued that the San Francisco Bay Area is still the place to be.

“Getting into the Bay Area is so relatively easy [compared] to all the other things you have to do to succeed. Choosing where to live is so relatively easy [compared] to all the other things you have to choose correctly. Why not pick up the easy wins? It’s an easy percentage multiplier. And this game is so hard, you might as well take the easy ones.”

This belief is even more widely shared for AI startups, Brazilian entrepreneur Bruno Vieira Costa told TechCrunch. “My own company is building generative AI models [and] based in Rio, so I don’t see it as necessarily true, but I understand for more junior founders, this must be relevant for mindset and references,” said Vieira Costa, whose no-code startup Abstra was part of Y Combinator’s summer 2021 batch.

Abstra’s founder thinks in-person batches are better for founder success, but that doesn’t mean that there aren’t tradeoffs. Relocating to the Bay Area is hard for many Latin American founders, and perhaps riskier. Their experiences, college backgrounds and professional networks  resonate less with U.S. investors, Vieira Costa said. Conversely, U.S. references were peppered through Demo Day, with founders mentioning their “nationwide” reach and their degrees whose fame isn’t always international.

While one cohort is not a trend, maybe YC, too, is returning to its U.S.-focused roots. YC’s latest request for startups called for companies to “bring back manufacturing to America” — a term that many in Latin America find grating — and the “new defense technology” section only mentioned the U.S. “Silicon Valley was born in the early 20th century as an R&D area for the U.S. military. […] This decade is the time to return Silicon Valley to these roots,” partners Jared Friedman and Gustaf Alströmer wrote.

If YC continues to slant toward U.S. companies, that doesn’t mean its cohorts would be less diverse. Several YC alumni with Hispanic founders were U.S.-based when they applied.

Do LatAM startups need YC?

Founders that went to YC often call the experience “life-changing,” and the impact usually goes beyond their companies. Colombian startup and YC alum Rappi, for instance, turned into a startup factory. Looking into its multiplier effect, entrepreneurship network Endeavor found out that 130 founders previously worked at the on-demand delivery company, whose founders also invested in two dozen startups.

Rappi is on the list of YC alumni with the most revenue, but otherwise, there isn’t that much overlap between the accelerator’s Latin American bets and the region’s top startups.

“When you look at the biggest startups coming out of Latin America in the past five years, they didn’t go through YC,” Latitud co-founder and COO Gina Gotthilf told TechCrunch via email. “We don’t know why, but it might be that YC is better at assessing the US market and opportunity.  Latin America is hard, there’s a lot of local context that’s hard to understand if you don’t have a local grasp and strong network.”

Latitud describes itself as “the operating system for every venture-backed company in Latin America” and offers a software platform for dealmaking, with funding from a16z and NFX. This also includes writing its own checks. On some level, it makes YC a competitor, but also a potential co-investor.. Salvy, the Brazilian company from its latest batch, is a Latitud portfolio company “where we were the first investor,” Gotthilf said.

Despite her bullishness about the region, Gotthilf can also see why an AI-heavy cohort includes fewer Latin American startups. “Most of the companies pitching [YC] are doing something in AI. I believe that core AI companies building LLMs in Silicon Valley have serious leverage right now and that real innovation in the field won’t be coming from Latin America so soon.”

This is also a reminder that many startups from the region aren’t applying to YC, or even seeking VC funding at all. A recent report on Latin American SaaS startups showed that one third went for the bootstrapping route. This has pros and cons: It pushes startups to be more efficient, but can also get in the way of bigger ambitions.

Griffero thinks that another factor is the region’s fragmentation, which makes it more difficult for founders to support each other, but he’s optimistic. “This situation is likely to change soon, as I’m seeing more founders from the region who are starting to think globally, instead of self-imposing the limit of being ‘X for LatAm.’”

Unlike predecessors like Mercado Libre, these companies will find venture capital firms both local and global willing to look at them and offer them less dilutive terms that weren’t the norm before YC became a potential rival.

There’s still the question of whether the math will add up for investors, since massive exits are still a rare occurrence for Latin American startups. But even if they succeed, doing it outside of YC means they won’t be part of its 10,000-alumni network. A lose-lose situation, or the price to pay for SF evolving from ‘doom loop’ to ‘boom loop’? You decide.

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