The storied Silicon Valley incubator Y Combinator held its Demo Day for its latest winter 2023 batch of startups, and it has been a feeding frenzy for VCs ever since. Investors are now on the prowl for startups focused on AI, and specifically generative AI, which saw a substantial increase in the latest batch.
VCs admit that some of the interest may have been driven in part by the 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. However, they also agree that there is a real use case behind the excitement. He notes that “there’s hysteria for a reason” and that “the companies that use this technology to solve intractable problems are going to be important companies in the future.”
This sentiment has been echoed by many investors, as AI startups have already landed investments from high-profile VCs. Yuma, a ChatGPT for customer service, was funded by Gradient Ventures and Frst. Lasso AI, which automates tasks on Google Chrome using ChatGPT and computer vision, was backed by Initialized Capital. Meanwhile, medical AI startup Latent raised capital from General Catalyst, and data management and analytics AI startup Turntable received funding from Nat Friedman. Leveraging generative AI technology for infrastructure and developer tools was especially popular, with Chima being backed by Elad Gil and Rubber Ducky Labs scoring investments from Bain Capital Ventures.
Even in the current market, investors note that valuations for AI startups have not changed much from previous highs. Lux Capital’s Grace Isford shared that startups were typically hitting a sweet spot of a $2 million seed round at a $20 million valuation, which is slightly compressed from the norm last year.
Y Combinator is one of the most successful and well-respected incubators in Silicon Valley, having launched numerous innovative and successful startups. It has been home to startups such as Stripe, Airbnb, Instacart, and Dropbox, realizing over 80 unicorns. Its success can be attributed to its focus on fostering innovation and helping founders build successful businesses. Nat Friedman, early-stage investor and former CEO of GitHub, is a firm believer in this mission, placing a bet on data management and analytics AI startup Turntable.
Elad Gil is an investor who specializes in early-stage investments in startups. He is a managing director at early-stage venture capital fund 001 Ventures, and was formerly the first Vice President of Corporate Strategy at Airbnb. His investment in Chima, which customizes generative AI models with customers’ real-time proprietary data, demonstrates his confidence in the potential of generative AI.
Bain Capital Ventures is a venture capital and growth equity firm that focuses on investing in disruptive software and internet-enabled technology. It is well-known for its investments in early-growth and later-stage venture investments. One example is its investment in Rubber Ducky Labs, which helps companies improve their AI recommender systems. The firm sees potential in the startups in Y Combinator’s fast batch and their ability to use generative AI technology to build solutions to real-world problems.
