Consumer is back, What's getting funded now, Immaculate vibes

Jared Friedman

It feels like there's more energy around this batch than there has been for as long as I can remember. For any YC batch, like, what do you think's happening? There's a platform shift, and this is the moment where every single SaaS dollar in the world, it's up for grabs again. The batch three x'ed ARR in three months, which is pretty cool. That's a great growth rate.

Yep. It's a fun time to build. It's the best time ever. I mean, I was like, as a builder, it's like the technology just such a different thing than what you expected before.

Gary Tan

Welcome back to another episode of the Light cone. We are four group partners at Y Combinator, and we funded hundreds of companies, many dozens of which have gone on to become unicorns. This is Jared. I'm Gary. This is Harj, and this is Diana.

We just finished the winter 2024 batch of Y Combinator, and it feels really, really different, doesn't it? It does. Let's talk about how this batch is so different from the batches that we funded in the past. Some of it is. You actually need to know where we've been and where we are right now in order to actually figure out where we're going to go.

And a lot of people watching right now are trying to figure it out. Like, how do I go to where the hockey puck is going? How do I get there before everyone else? The best way to figure that out is what happened in this batch. We're going to connect the dots with actual numbers that I don't think we ever shared before by stats of batches from four years ago, and contrast them with the numbers for this batch so.

Harj Taggar

You can see the actual trends, the way they're playing out here in the center of Silicon Valley. Yeah. I'm curious, like, what are some of the trends that we've seen? What's made this last winter 24 batch different to previous batches? Well, the strongest trend, the one that everyone is writing about, is AI.

That's definitely, like the big mega trend in the past year. Yeah. I was surprised when we were pulling up some of the numbers. It's just under 70% of the ideas are AI. 70% of the batch?

Jared Friedman

Yeah. That's wild. Yeah. It's about 170 companies. Yep.

Diana Hu

Versus winter 20. We only had 8% of the companies. Maybe one of the notables from winter 20 that you work with, Jared, was replicate. Yeah. Those replicate founders, they were into AI before.

Harj Taggar

It was cool, which was really awesome because they got to then ride this wave. But the first three years of replicate was slow going because there weren't a lot of people working on AI. They were building tools for people working on AI. There were many customers, and we didn't. Call it AI as much back then.

Gary Tan

We called it machine learning. Machine learning, totally. I would say one thing I've noticed that's different about dispatch is consumer ideas. They are certainly coming back like, I've gone from working, it feels like for many years with working with zero consumer startups to now just even in the group of companies I'm working with several of them, I've noticed founders who are pivoting during the batch are pivoting into consumer ideas, whereas previously I think they would have pivoted into like a enterprise b, two b SaaS idea. And I'm not sure what to think about that, actually.

Do you think it's bad or good? I'm not sure. Okay, here's Harj, and I have opposing viewpoints on this question. I made the case for why it may be bad. I think you could argue that pivoting into consumer ideas is sort of lazy, because so many of the canonical tarpit ideas are these bad consumer ideas, where it's like travel planning, travel planning, or splitting the bill at a restaurant, or finding a roommate, or all these kinds of things, right?

Jared Friedman

And people gravitate to them because it's so easy. Like, I just want to build, it's the advice of build something you want, which is great advice, but it means that you can often build these very easy ideas, and it's really hard to get lots of users for them. Whereas when it felt like people didn't want to work on consumer ideas, oh, okay, I actually have to go out and become like an expert on something. Like I have to go out and figure out how expense management works and see if there's any interesting ideas there. It led to lots of really, really good startups being funded.

So I partly worry that people will pivot into tarpit consumer ideas because it's easy. My perspective is, I find it so refreshing that consumer is back, because when YC got started, when we all did it in the 2005 to 2012 era, there were tons of consumer companies. In fact, the first YC batch was like 80% plus consumer. What happened is all the consumer ideas basically got done and there were no good consumer ideas left, or very few. And so we went through this whole super cycle where the only non tarpet ideas were b two b ideas.

Harj Taggar

And the problem with b, two b ideas is they're a little boring, let's be honest. Like b two b SaaS is like a little boring. If you think about what drew in young technical founders, like the original founders in the early YC batches, they were building consumer apps because they were fun. Both you and Gary, when you went through the batch, had consumer companies, right? Yeah, yeah.

We both started consumer companies because those weren't harpet ideas at the time. The problem was in 2020, starting a us based consumer idea was ill advised. If you were doing it, you were probably working on a bad idea. Well, the other factor here was just Facebook sucking all the oxygen out of the room. It felt to me like that era you guys are talking about.

Jared Friedman

So 2007 through to 2010, maybe there was just lots of optimism around building consumer ideas. That sounds familiar. Yeah, right. But then it felt like, for a period, it just felt like, hey, anything you build Facebook is going to, like, clone or crush. And it just seemed not exciting to get crushed by Facebook.

Gary Tan

You could argue that a foundational model might come along and crush that, but if you're working on a consumer idea. But I'm just kind of skeptical that that's true. There's a lot of white space in there to actually build real revenue. What would you advise if a founder came to you, Gary, and said, hey, somebody told me that I shouldn't work on consumer ideas because Facebook's just going to crush anything I do? Well, OpenAI or OpenAI now, OpenAI today.

Harj Taggar

OpenAI is the Facebook of. Yeah, GPT five is coming out soon. So what should we tell founders they come out to use? Like, okay, should I really work on this? I guess it's early enough that it hasn't happened yet.

Gary Tan

I mean, when I see Facebook actually come after replica in the AI boyfriend girlfriend space, then I'll sort of believe it. But some of it is the capability expands the ability of computers to sort of operate with human beings in such a broad way that they couldn't possibly be in all the places. Another big trend that we've seen is more developer tools. And Diana, you've worked with a lot of those. Do you want to talk about why, what's happening with developer tools?

Diana Hu

Yeah. In this batch, we funded about 30% more dev tools than four years ago. This is like one of the largest dev tool batches we've had in the recent years. And I think, couple reasons is I think there's attracting a lot of the super technical founders that want to build this future with AI. And before you build it, you need better tools.

Right. It's kind of like this technology trend where you have two phases. I think it comes from, this is from this book, from Industrial Revolution, from these economists. I think it predicts a lot how technology cycles happen. The first cycle is sort of where you're laying the railroads infrastructure, all the tooling before the installation and prolification of apps.

There's a lot of this kind of tooling, because even right now, for building an AI app, there's so much plumbing you need to do and customize it. And right now there's certain patterns that are emerging, like rag and doing a lot of the query and indexing and getting results to be more accurate and fine tuning. Those are not well known patterns. And everyone is building the same stuff to build the actual end application. So we have a lot of founders that are like really good tool builders that are excited to kind of build the hammer.

It would be really cool to see at some point all the way from distributed systems to evaluations to even as hardcore as probably at some point custom silicon. We could probably at some point see the next Nvidia being funded and gone through YC. One thing that's really interesting is I remember in 2010 when I first started working at YC, dev tools were not seen as a good idea to work on because people didn't think they would ever make money. It was only when Docker started taking off, then MongoDB started taking off. There was this era where it's like, oh, like devtools are things you can actually work on well, and for open.

Harj Taggar

Source companies in particular, because it was very unclear at that time that open source projects could actually be successful companies. Red Hat was the only example of that time. Yeah, I think this is a great. Devtools is just a great example of build something you want for yourself. And if you're an engineer, you can just be very self indulgent and build the tools that you want.

Jared Friedman

And there's actually a business there. Well, in that respect, devtools is basically, basically B two B SaaS, but consumer style. So you only have 20 million people who you have to actually market to, and you actually have to market to them in the same way you would for a consumer product. But instead of a billion consumers, you're talking about 20 million developers. And the cool thing is, most of those 20 million at some point are on hacker News, which is a YC website.

Diana Hu

It's like the New York Times for hackers. That's right. There's a lot of parallels because consumer ideas are not judged on how much money they make. Typically, consumer social in particular. Right.

Jared Friedman

Like, it's all just like growth and daily active users and monthly active users. And what I've noticed about open source. Open source, yeah. Diana, how do investors judge whether an open source startup in the batch is doing well or not? Some of the early signs is whether this is getting adopted by the tastemakers.

Diana Hu

And that happens to be in a GitHub project. You have a lot of GitHub star growth and also if you have actual, like, hardcore developers that are good using you. And early signs of getting in production with companies at this point, like consumer early in the early days for infrastructure and devtools, you don't really make money because things like installing a new database is such a big bet for a company that you need to make sure that it's battle tested. So a lot of open source companies take a little bit longer to monetize. Kind of like consumer, where it's all about user growth.

Right. And the second thing I would say is, ultimately, open source companies win when they really have to develop their mind share. It's sort of like Facebook, one with the network effects, with capturing a lot of the users. Like, I don't know, it's like a third or half of the world uses Facebook. Same thing for devtools.

It's like if anyone thinks of, let's say, building a full stack application and easy deployment, they could think of a supavase. I think they've done a really good job and I think you work with them. Jared, what was it at the beginning when they were doing the batch, and what does it look like now? Well, the cool thing about Supabase is literally what got Supabase off the ground is hacker news. They had built this open source project that was an open source competitor to.

Harj Taggar

What's it called? Google Firebase. Firebase. Firebase. Firebase, yeah.

Which is a YC company that got acquired by Google and then became a really big product inside of Google. And they were building an open source challenger at a Firebase and they built it. And like, how do you get users for something like that? Well, the thing you do is you launch it on Hacker News. And so they had this blowout, hacker News launch.

And to your point, Diana, it was clear, if you literally just read the comments on the hacker news post, it's clear that really good developers are like, this is exactly the thing that I wanted. Thank you for building it. And that was what, like, launched them into the stratosphere. And there's a recent stat about the percentage of the batch that's using them, we'll have to pull the number. But it's like a third of the.

Jared Friedman

Batches using 73 companies supabase on the. Current batch out of the 243 are using Supabase. That's like a third of the batch. Yeah. That's crazy.

Diana Hu

That's wild. Which is really going up against the big infrastructure clouds with AWS, GCP, right? Yeah. Investors really pay attention to the hacker news launches of these devtool companies because again, Supabase had a phenomenal round that they raised around demo day. And it was really all directly attributed to that hacker, the hackerness.

Harj Taggar

Yes. This is a free alpha leak for all of you out there that you could basically take almost any closed source dominant dev tool or platform and create an open source version of it, and you might just kill the closed source version of it. And this is a shot across the bow of every dominant dev tool or SaaS platform. And by the numbers in winter, 20, we only had five companies that were open source dev tools. In this current batch we have 22.

Diana Hu

So that is like a five x plus increase. 22 open source companies. That's a big shift. And we've seen this over and over again. I mean, there's sort of like the slack and then mattermost.

Gary Tan

There's sort of the GitHub and then GitLab, which was a YC company in sort of analytics, we have amplitude and postdoc. Exactly. So the other cool thing about this batch at Corey, of getting a lot of founders getting excited to work on AI and devtools, this is the most technical batch ever, right? Is like 99% of the companies have a technical founder in the current batch, versus just 88% during the pandemic. Let's talk about why that is.

Diana Hu

I mean, we talked about some of the driving factors from ideas, but I think there's a couple more things at play. I think one thing that feels very different now versus if we go back to pandemic COVID era, is I think there was this whole the software eats the world idea, which originated with a Mark Andreessen blog post, I can't remember, like maybe 2012, something around that, or a decade ago. Great essay. Yeah, great essay. Right.

Jared Friedman

But I think what it boosted was this idea of, hey, not every business is going to be a core software company. It'll be like software eats the world. It'll be software that sort of enables non software businesses to become software. What do you mean by that? Is it kind of more businesses that are operations heavy?

Diana Hu

Sort of, yeah. Let's give you some examples like, Flexport, I think would be a great one. Right? Like Flexport was, hey, there's this giant trade and freight brokerage business moving things around the world. And so much of that is done manually with humans filling out forms.

Jared Friedman

And flexible was, hey, like, well, that could be. Why don't we just have like a software team that builds software to help the people who are managing, like the freight and the brokerages do this more efficiently. It's tech enabled. Tech enabled. And I think a consequence of that is that especially with the Zurp era where I just felt like there was lots of money available to fund ideas, that the profile of founders became a little bit more tilted towards, like, can you, do you have domain expertise in a non software business?

Like, are you like someone who's in the shipping industry who now wants to start, like, a tech company? Something spectacular examples would just be like, wework, right? Like probably the poster child of like, tech enabled. But I just think that the profile I found to shift a little bit away from like geeky engineer Adam was not technical. Yeah, right, right.

Exactly right. He was not looking at all. And actually, to that point, this whole trend is like somewhat controversial about these tech enabled businesses. And there's some that seem to be on the right side of the line where they actually were tech enabled, like Flexport, which is working. And there are some that were on the other side of the line where they claimed to be tech enabled but really weren't like WeWork and those ones didn't go so well.

But I think AI is a force in the complete opposite direction. Right. Where it feels like if you want to work on a good AI idea, you need to be at the cutting edge of actual AI technology and tooling. Which means table stake. Yeah, right.

Diana Hu

Because all this stuff is cutting edge, which I think it gives a bit of edge to a lot of founders that don't have baggage because everything is so new. All of the latest progress in AI is just like one couple years old. And this is one of the batches that also has shifted the median average age of the founders also be younger. There's another version of this story that I've heard told, which is that in the like 2020 era, there hadn't been a technology platform shift in a long time. Venture capital funds had billions of dollars to deploy.

Harj Taggar

They had to deploy it someplace. The best place to deploy it was these tech enabled businesses that were going after industries and companies that didn't really look like the traditional tech businesses that venture capital was set up to fund. But there weren't a lot of great new tech opportunities because there wasn't a new platform shift. Now there is. And so it's a much higher ROI use of those venture capital dollars to fund stuff like Rai companies, that stuff like WeWork.

Gary Tan

Yeah, I think one of the interesting subtleties is in my head, it's a little bit less about whether it's tech enabled or not. That is certainly one frame. And a lot of VC's actually really stick to that. I mean, there are some really famous firms that famously only want to fund pure software businesses that are monthly or annual recurring revenue. And that's a whole strategy.

There are a bunch of those firms that we've all heard of that are our friends, that's all they do. And then there are just as many who actually look at it and say, oh, actually I'm willing to do tech enabled, but there are a lot fewer of those people. And then I think the real subtlety, I'm sort of a little bit more in the latter camp because what really matters is actually the gross margin. So if you look at a palantir, for instance, you can have a 90% gross margin or 80% gross margin type of tech enabled, you know, quote unquote, almost consulting business. But if your gross margins are extremely high, then people are actually willing to give you good multiples and you're actually able to raise money at a reasonable valuation.

I think what's funny is when we give the t shirts at Y combinator, like when you come to YC, you get a t shirt that says, I'm wearing it, which people want. Yeah, there you go. Because it's the end of the batch. What's funny is, notice none of this mentions anything about whether you're tech enabled or not, whether you're a software business or not, or even gross margin. It's just purely a function of if you make something people actually want, people are going to pay for it.

And then the rest is just sort of details. You can actually look at the, to date, the biggest YC companies by, let's say, they've gone public. Airbnb, Doordash, Instacart. It's not clear that on the surface at least, the technology is what sets those apart so much as it was for Airbnb website. But the core thing is building like a network and a reputation system.

Most powerful network effects ever. Yeah, right. DoorDash and Instacart are arguably more logistics companies than like, true tech companies. They're the best example, actually, of maybe the tech enabled label is a tricky one, because those are actually probably technology companies, but you could, one lens you could put on them and say they're tech enabled, but they're also two of the biggest companies we've ever funded. But they come from a different era when a lot of the rest of the world was still coming up online.

Diana Hu

Right. That's what it feels like to me, just how we're talking about trends. It just seems to me, to your point, Jarrah, that there was a period around 2006, 2007, it was just pure software businesses. Then it was like, hey, software is going to be bigger than just pure software. And we got kind of doordash and Instacart and these interesting businesses.

Jared Friedman

And then maybe it really, maybe it pushed too far where there was like, we work. Yeah, we work where it's like, hey, this is. There's no software. There's no software here at all, really. Right.

And that's what it feels like has been a big reset, which AI has sort of. It's almost like AI has taken us back to that start where it's like, okay, actually we just want to fund things that, like, what's interesting is like the technology. Well, it's because there's good software opportunities again, like, we ran out of them. That's why the venture capital dollars, like, shifted to the wework stuff. Yep.

Harj Taggar

And now they're back. It's a platform reset. Platform reset. We're so back, guys. So what, have we funded less of this batch?

Jared Friedman

What have we seen moving the opposite direction? Well, we funded a lot less stuff going after local markets. So in the 2015 to 2020 era, YC and just like the world in general funded a ton of companies that were basically the second wave of all these online to offline things. So the first wave was like Doordash and Instacart in the US. And then the second wave was like, well, what about DoorDash if you're in Brazil, they want their food delivered too.

Harj Taggar

What about Instacart if you're in India? And so there's a whole wave of taking these models and copying them in. International market fintech too, right? There was like, we saw Coinbase, Robin Hood, neo banks, neo banks, Monzo in the UK. And there was two waves of that as well.

There was a first wave primarily in the US, like Brex, for example. But a lot of fintech businesses are actually local because regulations are so different in each country. And so then there's a second wave of like the international copies of all the US based things. Yeah, definitely during that period, like the 2020 to 2022 period, we were funding a lot of international teams that were like Robinhood for LaTAm or like a local crypto exchange or. Yeah, like DoorDash for ex market.

Jared Friedman

Lots of these kinds of things. Yeah. And a lot of those were really good. YC funded some amazing epic companies there, like Monzo, which banks some ridiculous percentage of the people in the UK grow. In India, which is Robin Hood for India, is doing phenomenally well.

Harj Taggar

Zepto, which is the fastest growing YC company of all time, which does ten minute grocery delivery in India. I think that's a really interesting one, actually. Cause it's very easy to say Zepto is like Instacart for India, but it's not quite. It's not right, because their actual model is different. It is, yeah.

Diana Hu

By the numbers. Specifically around the 2020 era, winter 20 batch, only about 45. 45% of the batch was international, and now it's only 25. Yeah. This is the most us centric batch we've had in a long time.

Jared Friedman

Most of the teams when they applied are in the Bay Area, so about 29%, which, interestingly so Tiber also means San Francisco is definitely back. So we looked at the numbers and pre COVID, around 29% or so of the companies were in the Bay Area when they applied to YC. And it was half of that during pandemic. Yeah, right. We're down to like 14%, something like that.

And now we're back up to where we were before. So, you know, even higher, actually. Yeah, even higher than we were pre. Pre COVID. I think because there's so much about Cerebral Valley, all the AI progress happening here.

Harj Taggar

I think the fundamental reason, it's not to be clear that we woke up one morning and we were like, we got to fund more us founders. That was not what happened. What actually happened, I think, is basically the best founders chase the best opportunities and YC funds the best founders. And so what are the best opportunities? Well, in 2020, there were amazing opportunities to take models that were working in the US and launch them in other countries.

And so amazing founders, like audit from Zepto, that's what they worked on. And now the best ideas are like, that trend has sort of run its course now. And, like, most of those opportunities have been done. And so the best founders have had to move on to other opportunities. I'll give you stats for that.

Diana Hu

Specifically, like winter 24, we have four times less marketplace ideas than 2020. If we're seeing more consumer and dev tool ideas, it also makes sense because those aren't local at all. They're exact opposite of your point. Like, actually, if you want to build the best AI dev tool. Yeah, there's no such thing as an AI dev tool for Brazil.

Harj Taggar

It's just like another thing that we're finding a lot less of now is crypto. And here's something that the audience might not know about the two of you, which is that Gary and Harge are two of the most successful crypto investors of all time. Literally. You two were the first investors in Coinbase and you made literally billions of dollars investing in crypto. Billions of dollars.

Right.

Gary Tan

Some of it is going back to being around Y combinator, reading hacker news and finding out about this thing called bitcoin, reading the Satoshi Nakamoto white paper and just saying like, well, what is this Mount Gox like, magic, the gathering online exchange website in Japan, having to do some weird wire to, you know, some sketchy country on Western Union in order to get money into this weird website that would sell bitcoin. And having that experience be so bad. Like, I remember doing that and thinking, well, this is a very interesting idea. And then again, if very smart technical people on hacker News are doing this and believe this might happen, well, this might just be a thing. So as two of the top crypto investors, what happened?

Harj Taggar

Why were there no crypto companies in winter 24? I mean, I was looking for them. I think what's really interesting about this zooming out is if you talk about when Coinbase applied to YC and we funded them, it was a very counter culture idea. You have to be, Gary, really into this stuff. There was no hype around crypto.

Jared Friedman

It was not seen as a very fundable thing. Then what happened is crypto will go on these bull runs, which is basically really the price of bitcoin. So when the price of bitcoin tends to go on these sort of meteoric pumps, and anytime that happens, it brings lots of people into crypto. And I think at YC, what we would see is it would bring in lots of people applying with crypto ideas. And then that's clearly what was happening during the COVID era, is crypto had this huge run.

Coinbase went public, we saw a surge in crypto applications. So we just funded a lot more crypto companies. What I think is really interesting about this current moment is we're going through, we're in the middle of another crypto bull run. Like bitcoin just hit another all time high recently, but we have not seen a surge in crypto applications. Fascinating.

Yeah, right. And it's like, it's clearly because all of those minds want to work on something else, and we know what the something else is. It's like, it's AI. Like, I think AI is just dominating the mind share of engineers. Whereas previously, bitcoin hitting a new all time high.

Dana, don't you have a story about when you went to MIT last year that you could still see some of the remnants of that crypto mind share at the college level? Yeah. So MIT has some of the smartest kids in engineering. And what was really interesting to me, there were a bunch of kids that dropped out and undropped out, and they. Dropped out to start crypto companies.

Harj Taggar

They dropped out to start crypto companies. They raised like millions of dollars and they thought they were like on top of the universe, like high flyers. And then what happened? Then around that time, things crashed. Right.

Diana Hu

And things stopped working. So they were top of the mountain. They were like hotshots. We dropped out of MIT. We just raised $5 million.

We're going to be the next Mark Zuckerberg for crypto. And then I talked to them and they were back in school like normal kids, but there was a bit of kind of like, ship on their shoulders. It was embarrassing, actually, to come back to school. It was not seen as a badge of honor to drop out of school. And when I asked them what they wanted to do next, it's like, oh, I just want to finish school, and then once I finish, I'll figure out another startup.

Harj Taggar

The failure of the crypto startups gave all startups a bad name, rather than just like crypto scams, which is the. Actual problem, because they didn't want to work at a startup anymore afterwards. Some of them, the words like, oh, I don't know yet. I think there's another undercurrent behind all of this because it can be very jarring. You have this kind of very bipolar experience from going to the top.

Diana Hu

You're getting investors to throw money at you. You have this non twitter account that has hundreds of thousands of followers doing. You bought your bored ape. Yeah, you got all the bored apes, a collection of them, and you're running this giant exchange, and then things just crash. You get sued by the government.

That could be another case. And then what's your plan b? And then you come back down, hit ground floor so deep. And it can be very demotivating. The government stuff you mentioned is actually on a very crypto specific topic, is a huge thing where, like, the US has chosen this regulatory regulation by enforcement approach, which is just incredibly scary.

Jared Friedman

If you want to do anything interesting. In crypto, is this casting a chilling effect because people are worried that if they're successful, they could literally go jail? Yep, exactly that. I mean, Diana and I have a company that we just worked with in this batch where the founders had previously, they're young, smart, technical founders who had previously started a crypto exchange and were sued by the government. And they are clearly still, like, traumatized by that experience.

Right. So I think it's a real shame because in a way, this is like a great time actually to work on a crypto idea, because at a high level, it's like, hey, programmable money. And now we've got, like, AI agents that can, like, do lots of things autonomously and the tourists are gone. Yeah, right. This is actually a great time, but I think in the US, at least until it feels safer to build these companies, it's going to be hard for crypto to recapture that imagination.

But I still think by far and away, the big reason is just AI is the exciting thing to work on. Which actually I do see. I know it's a bit of a meme of former crypto founders going into AI. My hope is actually that for a lot of these crypto founders that went through this ride, that they kind of get back up on their feet and get back to building because it's actually fun. I think the sad thing is some of them really got defeated.

Diana Hu

And my hope is that they get that optimism back again, because that's the thing that as a founder, you lose it. It's like game over. But they're definitely back. We were talking about this where it feels like we come across more applications. We were talking about this with one of my partners.

Harj Taggar

We funded a record number of MIT grads in the last batch, the most YC has ever funded. So it cast a chilling effect for a year. It's. And in particular now when we talk to young founders, and I think this is why the median age of the batch went down slightly. Right.

Jared Friedman

The median age was around 34 years ago, four years ago, and now it's like 26. And I think I'm just seeing more people being willing to drop out of college. And often what we say to them is, hey, like, there's no rush. Like, you should just, like, graduate college. Why do you have to start a startup right now?

And the response is, well, like, this might be like a once in a lifetime opportunity. And I think for the first time, I'm like, you might be right. Right. The reason this time is different as it relates to this sort of AI. Oh, no, you said the magic words.

Yeah, I said it actually is different. I think crypto has always suffered from a couple of problems. One is that it's always been very hard to explain the products. They tend to be very complicated and not user friendly. And so it's just hard to explain what even does the crypto thing do?

Because it tends to be some sort of complicated lending thing that only other crypto people understand. And the second is that it's always been hard to understand, like where the money comes from. It can be this sort of byzantine, complex thing trying to figure out, like. You feel like monopoly money. Yeah, basically.

Right. That's always been the criticism. It's always felt like these things weren't real often. But like this time around, I think working in this batch with so many AI companies, it's felt very real. The products were very tangible.

Diana Hu

There was a cool experiment we ran with harsh in this batch, we ran product day where we had all of our companies come and do a demo, run through product, other product. Yeah, running. And a lot of the products were beautiful. I was very impressed with the progress they made from the time they applied to what they had because one of the stats is in this batch, over 80% of the batch had no revenue. Basically, product was unlaunched before they came in, versus in winter, 20, about only 62%.

So we funded even earlier and in the span of just a month ish, these products were like pretty impressive, right? Yeah, I mean, I remember that when we did product, they just, some of the moment, it just felt like constant wow moment after wow moment. Like someone would demo, like one of the companies fume demoed like the AI software engineer. And their demo was literally, hey, you can basically tell this AI software engineer to implement dark mode on this website. And they showed a website, just regular layout, and fume engineer goes and implements in CSS and everything, the dark mode.

Jared Friedman

And then you go back to the website and there's a toggle to turn dark mode on and it's just like, wow. You could see it writing the code and doing all of this stuff and it was like you could tell this is something that's very real. And there's another thing that we did that returned YC to its focus on products. Do you want to talk about the bookface launch live events that you started this batch? Yeah, during the batch I really felt like, well, these demos are so cool.

Gary Tan

I'm totally going to steal your idea for this next batch where, you know, I definitely, I think that we should do this type of demos across the whole batch. And then I also did Friday, every other Friday, we would pick the people who had the most impressive launches on our internal social network and we'd have them actually demo exactly what they built. In front of a live audience. Yeah. And then I would actually ask a very detailed implementation question, because literally a lot of these things, it's the first time you've ever been able to do that demo, for instance, and being able to understand, well, what did you do?

How did you use retrieval augmented generation to do that? What were the prompts? What was the workflow? How do you test that kind of stuff? Going back to the dev tool argument, we're literally trying to figure out how these things work.

And then there's going to be a whole new reset in even a matter of months with GPT five and the next generation. Like, this is very homebrew, computer club type stuff. Like we just suddenly had this thing that could happen and next week some other crazy things going to happen. I love that because it really felt to me like a return to the YC that I did in 2006, 2007. The focus of YC was really about the products because we were inventing new things that you could do with software.

Harj Taggar

And then in the decade afterwards, because there's so many software enabled businesses and the technology became commoditized, there was less focus on the product and more on growth and sales. I hadn't thought of that. You know what just sprung into my mind as you're saying, that is 2007, when I first moved to San Francisco from London in my YC batch in winter 2007, were Weebly and Zenter, and they were pushing the limits of what you could do with JavaScript. So Weebly was a website builder, and Zenter, which would get acquired by Google, was like web PowerPoint. That was cutting edge stuff.

Jared Friedman

Yeah, seriously. It was really felt like every week I remember you'd come to YC dinner and you would go and check out what the Weebly and Zenter teams had done the previous week, and you'd be like, wow, you can create a slide. You can create a slide with an animation in the browser. It's crazy. And it even works in Internet Explorer.

Yeah, that was the thing that you can do across all browsers. And it felt like, yeah, I hadn't thought about that until you said Jared. But yeah, that was so much of the energy was you felt like you were around people really inventing stuff. It actually, that team, those two founders and basically kick started all of the Google Doc suite like doc sheets. And in winning, think about it, back then in 2007, it wasn't clear that you could replace Microsoft Office with a bunch of applications in the web.

That would have sounded insane. I think the other thing, I remember doing the bookface live demo, I think that feeling was there. I remember seeing the demo of retail AI. So they were building this voice AI agents, and during the demo they did a call to the AI agent and they pretty much passed the Turing test. That's pretty amazing.

Diana Hu

You would have conversations with it. And that's the moment where I think it was just so fun to be alive now and working on this. And it's turning into like real businesses again, the crypto analogy, a lot of the criticisms were a lot of products were promising, like high yield, risk free, high yield products, and we would take like a spread on the yield. Again, very complicated to understand where the. Money zero sum stuff basically.

Jared Friedman

But like, it was like, it was. The promise of future usage. It was like someday when everybody switched to a decentralized Airbnb, it'll be really big, but no one's actually using it to rent apartments. Yeah, but in this batch we're seeing companies add like this AI boom. Companies are adding like real recurring revenue by selling software to legit businesses.

Right. I mean, I think we looked up some data and you actually measured it, right? Yeah. So I pulled the numbers on this. 80% of the batch came in with no revenue and the majority had not launched any product at all.

Harj Taggar

They didn't have any users. If you look at the start of the batch in January, the total batch, all the batch companies together, if you add up their total revenue, they were making 6 million arrival companies. Yeah. So the ARR of the batch, which is kind of like a funny concept, I don't think we'd ever really thought about the ARR of a batch. That's a good metric.

But like, the ARR of the batch was like 6 million in January, and by demo day in April, it was 20 million. So the batch three x to ARR in three months, which is pretty cool. That's a great growth rate. You think of all the economic growth that got produced, is kind of think of these companies as they keep growing and compounding and accelerating. A lot of this growth, which is new, is definitely not zero sum.

Diana Hu

It's this whole world of creating a bigger and bigger pie or like a new matrix or new maze. Right? Yeah. And I think what's getting people really excited about the future of AI in particular is this is not just taking money away from existing software budget. So much of this work is replacing labor and so you open up to like labor budgets.

Jared Friedman

And so I think like all of that has just fed into this general. If we just like go off the vibes, this batch has felt like it's like been like the best one yet. Like there's more specifically, it feels like there's more energy around this batch than there has been for as long as I can remember for any YC batch. What do you think's happening? And one time that I felt that really viscerally was that the in person investor reception which Gary created new for this batch.

Harj Taggar

Do you want to talk about it, Gary? Well, so Demo Day is still perfectly online and it works great. But one of the things we really wanted to do was thank some of the best people who have funded YC companies all these years. And it was right here in our San Francisco hq. It was three whole floors of some of the smartest investors in the world with our batch companies just hanging out and the vibes were immaculate.

Jared Friedman

It felt to me like at the reception talking to investors that there was a real reset on preconceived. What's a good idea and a bad idea. People were just renewed sense of optimism and it felt like everything's up for grabs. I worked with a company called Octolane which got lots of investor interest and what they're doing is AI sales. It's Salesforce rebuilt if in the AI world.

And I just think investors did not want to fund Salesforce competitors for a long time because it just felt like how are you going to compete with Salesforce? But now with AI it's like oh, we'll totally fund a Salesforce competitor because. It seems possible that you could actually win against Salesforce. Now there's a platform shift and this is the moment where every single SaaS dollar in the world it's up for grabs again. It's an exciting time.

Founders are more excited to build than ever, investors are more excited to invest than ever. And we're just right at the center of it all here at YC. It's awesome. It's a fun time to build. It's the best time ever.

Diana Hu

I mean as a builder it's like the technology just does such a different thing than what you expected before. I think this is why you have the earnest founders that love building coming back and doing this. So do we think that this batch was peak AI? What's in store for the next batch? I mean, it feels like because we talk so much about all the progress on the current batch, it seems like it's done and all the good ideas are done.

I actually think the opposite, because this batch was the one where we had the most pivots to 30% of the batch pivoted and landed in good ideas, versus in four years ago, only about 10% of the batch pivoted. So that's one very fast defined ideas. There's still tons of them that are good. And if we go back to the analogy with how history kind of remixes and repeats a bit is, I think of this time more like Facebook is still getting created in the dorm rooms. So if you all want to be the next big AI company, this is the time.

Jared Friedman

If you talk about what we were saying earlier, Jared, like if now is sort of the equivalent of 2007, when it felt like web technologies were being pushed forward for the first time, it was actually still like three years until Airbnb was started, five years until DoorDash was started, six years until Coinbase was started. These trends always play out much longer than people think they're going to. So, in summary, we are just getting started. That's all the time we have for today. But y Combinator is actually accepting applications for this summer.

Gary Tan

So if you're thinking about it, those questions will help you shake out. Is this the time? Do I have the co founder? Do I have the idea? And at the end of the day, now is the moment to start.

So we hope we'll see you this summer and we'll see you next time.

Consumer is back, What's getting funded now, Immaculate vibes | Lightcone Podcast

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1. Introduction to the 2024 Winter Batch

2. Trends in Startup Funding

3. The Shift to Consumer Ideas

4. Evolution of Developer Tools

5. Reflections on Past and Future Trends

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