What Over a Decade of Y Combinator Data Reveals About Artificial Intelligence
Artificial Intelligence startups have arrived, sparking the third wave of technology
There are many who think that artificial intelligence is just the engine behind robots such as R2D2 from Star Wars. While not completely wrong, AI has growing influence in many other business sectors. Research of where investment dollars are headed within Y Combinator reveals that artificial intelligence presents significant market opportunities in Next Gen AI Infrastructure, E-Commerce & Retail, and Healthcare. My analysis is a result of devoting a quarter going through the entire Y Combinator Database. This rigorous process involved plucking out each artificial intelligence company to conduct a deeper dive: The key data extractions include what industry each company is in, what specific AI processes they use, how much funding they have received up to date, and more.
A Brief Intro on Y Combinator (YC)
¹Y Combinator has seen more than 2,000 companies go through its accelerator program. More than 100 have been valued over $150 million and 19 have been valued at over $1 billion. The accelerator program’s vast amount of investment data provides a sneak peek of early-stage venture capital industry trends and opportunities. While the YC startup market has provided general insights within verticals, the increasing class sizes of YC now reveal to us the additional dollar opportunities of integrating artificial intelligence.
YC AI Firms Growing in Number and Quality
As illustrated in the chart below, AI has grown through its presence in early-stage startups in the accelerator. This analysis is compiled from all public information available. The data is, however, imperfect given that there are companies that are in stealth mode not ready to reveal their product(s).
Since 2015, the YC classes have featured an increasing number of AI startups, with company roles once filled by employees now being replaced with machine learning, deep learning, neural networks, computer vision, and more. The S20 class has many companies that are still in stealth mode and do not have full information on them due to their early-stage circumstances as well as due to the COVID-19 pandemic. Nonetheless, AI-companies as a percentage of the total number of YC companies in the latest W21 class significantly increased. The data shows that AI companies have gone from less than 10 per batch, to approximately 50 — a fivefold increase.
Top Y Combinator AI Sectors
The data also provides a perspective on what industries are adopting AI through the quantity of startups. A plethora of Next Gen AI Infrastructure and Healthcare companies are entering YC. The data presented is NOT a ranking system of industries having a greater impact than others. It is a collection of observations featuring the total amount of AI-startups in certain business verticals and the approximate aggregate funding present within that industry.
Next Gen AI Infrastructure
The majority of AI funding in YC has been placed into what can be defined as Next Gen AI Infrastructure. The backbone of AI is Infrastructure which consists of numerous subcategories such as AI model development, computer vision, development operations, and natural language generation/natural language processing. These subcategories are the startups’ main value proposition. One example of a Next Gen AI Infrastructure startup is Activeloop (YC Class of S18), a company that allows businesses to harness unstructured data more easily to build complex machine learning models.
“Delivering valuable insights from unstructured data is difficult and expensive. Unstructured data processing is computationally very expensive. At Activeloop, we enable organizations to unlock the true potential of their data.” — Davit Buniatyan, Activeloop CEO
E-Commerce & Retail (E/R)
²The E-Commerce & Retail industry has shown a potentially special market opportunity. In an April, 2018 McKinsey & Company Discussion Paper, it was noted that AI has the highest potential impact in the E/R sector measuring in the billions of dollars. Indeed, E/R has received the most aggregate funding from investors amongst the AI-startups in YC. There are approximately 17 startups in YC that use AI to assist in different facets of E/R. While there are more than five other industries with quantifiably more startups integrating AI, the funding being poured into E/R startups using AI show the large valuation opportunity. Investors understand that millions of users flock to companies like GOAT Group (YC Class of 2011) — the leading online marketplace for sneakers, apparel, and accessories. GOAT Group’s ability to use AI to verify sneaker authenticity has recently helped them achieve a $1.75 billion dollar valuation. It is difficult to confirm the correlation between McKinsey & Company’s data and YC’s selection of E/R startups. However, it is clear that retail is quickly becoming a more autonomous, machine-driven industry where machine learning is replacing the simple human labor that has dominated consumer products for centuries, creating intrigue from both consumers and investors.
Healthcare
The emergence of AI in Healthcare is another notable trend. AI is being leveraged in the race to find the right drugs to cure the most prevalent and unstoppable medical obstacles. Companies such as Atomwise (YC Class of 2015) are using deep learning to power drug discovery while others are using machine learning for COVID tracing as well as powering medical research/operations. Since YC batch W2020, there have been approximately 10 Healthcare companies with AI implementation. COVID contact tracing and drug discovery have been points of emphasis throughout the past 12 months.
Where Investor Dollars Are Headed
Presented below is an approximate aggregate amount of funding that AI startups in each industry have received. E-Commerce & Retail, Healthcare, and Infrastructure are sectors where funding is particularly prominent.
AI is Making Its Way Across the Gamut
“We are enthusiastic about continuing to make investments in the brightest and most resilient YC AI founders, building companies that define massive new markets.” — Suman Talukdar, AiSprouts VC Managing Director
Y Combinator’s 15 years’ worth of information suggests AI is rapidly heading towards mainstream adoption as companies are utilizing data to automate their activities. The data also suggests certain industries are getting more AI dollar investment than others (e.g., Business Operations, E-Commerce, Sales & CRM). Nonetheless, founders of startups specializing in Next Gen AI Infrastructure, Healthcare, and other mainstream industries should be encouraged that capital allocation will continue to grow in their respective sectors. I am excited that right before our eyes what was once considered sci-fi is entering the commonplaces of business enterprises. Welcome to the third wave of technology.
I completed this report during my internship with AiSprouts VC as part of my Santa Clara University Entrepreneurship Class. I want to express my appreciation to Suman Talukdar, AiSprouts Founder & MD and Santa Clara University Entrepreneurship Lecturer Christina Johnson for giving me the opportunity to assess the AI startup community. I also want to thank my friends at Accel Partners, C3.ai, and the SCU VCIC team for their invaluable encouragement and feedback. If there is an interest in further dialogue regarding AI startups, I can be reached at noahlack1@gmail.com
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