January 15, 2024
VCs are scrambling to invest in AI startups in Y Combinator's latest class: 'There's hysteria for a reason.'

It's been less than a week since Demo Day at storied Silicon Valley incubator Y Combinator, but already, investors are on the prowl.

It's been less than a week since Demo Day at storied Silicon Valley incubator Y Combinator, but already, investors are on the prowl.

In Y Combinator's latest winter 2023 batch, a number of startups have already landed investments from high-profile VCs, Insider has learned.

Startups focused on AI, and generative AI specifically, which saw a substantial jump in the latest batch, were some of the most highly sought after by investors.

VCs admitted that some of the interest may have been driven by hype in the space.

"The folks that were sprinkling this generative AI pixie dust in their pitches seemed to have a little more buzz around them," Emergence Capital general partner Jake Saper said, adding that a number of YC startups had pivoted into generative AI from a different original focus.

However, even skeptics agreed that real use cases and technological advancement lay at the root of the excitement.

"There's hysteria for a reason," Saper said. "The companies that use this technology to solve intractable problems are going to be important companies in the future."

An AI feeding frenzy

VC buzz was common across generative AI startups both in the application and infrastructure layers.

On the application side, Yuma, a ChatGPT for customer support, landed funding from Gradient Ventures and Frst, according to one person with direct knowledge of the financing who was not authorized to speak publicly.

Lasso AI, which automates tasks on Google Chrome using ChatGPT and computer vision, scored capital from Initialized Capital, according to two sources, and the trend towards vertical-specific use cases of generative AI continued, with medical AI startup Latent raising from General Catalyst, three people said.

Leveraging generative AI technology for data management and analytics was a popular focus for YC startups like Turntable and Outerbase. Nat Friedman, early-stage investor and former CEO of GitHub, placed a bet on this mission by investing in Turntable, according to three people familiar with the deal, at a $22 million post-money valuation, one person said.

Initialized Capital and Latent declined to comment. Lasso AI, Turntable, Gradient Ventures, Frst, General Catalyst, and Nat Friedman didn't respond to a request for comment.

Infrastructure startups and developer tools aiming to help engineers train, optimize, and run AI models more efficiently and build on top of AI models were equally hot amongst VCs.

Chima, a startup that customizes generative AI models with customers' real-time proprietary data, underwent an especially competitive deal process, with investor Elad Gil eventually taking the lead, according to three sources.

Chima and Elad Gil did not respond to a request for comment.

And Rubber Ducky Labs, which helps companies improve their AI recommender systems, received an investment from Bain Capital Ventures, according to four sources, at a $15 million post-money valuation, one person said.

Rubber Ducky Labs and Bain Capital Ventures declined to comment.

Valuation immunity

VCs also noted that AI was the one area where they didn't see valuations fall from previous highs.

Lux Capital's Grace Isford told Insider that many startups from this batch were pitching investors on valuations that were "a bit compressed" from what was the norm last year.  

Typically, startups in this batch were hitting a sweet spot of a $2 million seed round at a $20 million valuation, Isford said, while in previous years the same companies would have been raising closer to $3 million at a $30 million valuation.

But AI was the one sector where the price of deals hadn't fallen nearly as much, she said.

And despite some investor concerns that YC's new deal would make startups too expensive for a down market, others were not concerned with the high cost of the buzziest YC startups.

"There's always been a different pricing set for YC companies," another seed investor who attended Demo Day told Insider on background, but that their team was "confident that we're worth the dilution that we're requesting."

Vlad Magdalin

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