Demo(day)lition Derby

This is The Startup Breakdown, the newsletter where we breakDOWN startUPs (just had to make sure you appreciated the word play). By joining this growing community of hundreds of curious individuals, you're getting firsthand access to my observations and opinions on the current state of the startups and venture scene. If you'd like to receive these newsletters directly in your inbox once a week, go ahead and subscribe to never miss an email!

Happy Monday, folks.

So you know how I said that last quarter was no bueno in terms of fundraising numbers?

It turns out that the truth was even worse. Yay!

The 53% decline in VC investing YoY for Q1 would have been even larger if it weren’t for two outsized rounds which skewed the total up. The curve breakers of the bunch were OpenAI (surprise i know) when it raised $10 billion from House Gates and Stripe which raised $6.5 billion. These two deals accounted for more than 1/5 of all money raised.

Even worse, it seems that the seemingly more resilient stages are finally feeling the heat:

• Seed stage: $6.9 billion, down 44% YoY; this marks a noticeable change from prior periods where earlier stage companies were less impacted by the broader downturn

• A-B: $25.6 billion, down 54%

• C-D: $43 billion, down 54% (again, OpenAI and Stripe made up 38% of this group)

Larger startups (less speculative) are still being hit harder, but the poison is beginning to seep into other earlier stages as well. Not exactly great news for the aspiring founders out there.

There’s plenty of dry powder waiting to be deployed. Unfortunately, like Kendall Roy, investors seem to be reluctant to part ways with it.

Side note, Succession references two weeks in a row… can you tell what I’ve been watching lately?

It wouldn’t be a day that ends in y without a mention of AI, so here’s the obligatory rundown of the state of this industry’s fundraising in particular.

Total investment in the space is actually slowing, but don’t tell the companies that are still raising that. Average valuations for firms raising money have more than doubled from last year, hitting $90 million through Q1 compared to last year’s already-scorching $42.5M.

It’s worth noting that the selection is limited, the same excuse I use when justifying ordering the exact same thing from Falafel Corner every night at 3am. Only 9 deals were used in calculating this average.

Last year, a whopp(er)ing, whopp(er)ing, whopp(er)ing total of $4.5 billion was invested in the space. It might be hard to top that total this year, but if anybody can make our Wall-E-like futuristic ambitions come true, it would be the combination of the FAANG gang trying to out-duel each other for Jarvis supremacy.

Unfortunately for aspiring entrepreneurs in India, the startup world just got Fyre Fested.

A couple of weeks ago, thousands flocked to New Delhi for the first ever World Startup Convention, a seemingly massive event claiming to connect aspiring founders with free-spending investors. I hope that you picked up on the use of the words “seemingly” and “claiming” cause that’s not quite what went down.

Advertisements mentioned investors including Elon, Sundar Pichai, and Guatam Adani (wait he still has money to spend?). Worse, the event was promoted by big name creators and celebrities in South Asia, drawing a crowd of thousands of people, many of whom had spent hundreds of dollars to get to the convention center where they were greeted by… just themselves.

There were no investors in sight. There’s only so many times one can try to sus out who has money to spend with “so uhh what do you do?” until they start to realize that literally everybody else was doing the same.

As attendees began to riot like native Tenneseeans when Publix run out of chicken and wild rice soup, the event’s founders claimed that investors were there but just dipped when they saw the chaos. Yeah, same thing happened with Drake at my bday party last year.

Attention has now turned to the influencers who promoted the event over the last few months. Some claimed that they had ended their association with the event months ago and had requested their image be removed from marketing materials. Others are pulling a Soulja Boy and not saying anything.

The story is even better as the fraudster behind the actual Fyre Festival, Billy McFarland, was released from prison this past week for his role in the not-so-fire music extravaganza. It’s clear that he has learned from his mistakes and is rehabilitated so as to contribute positively to society.

Personally, I sit in the back of economy with my packet of free peanuts and seats that don’t recline. I’m always envious of those in the front of the plane. or at least I would be if I could see through the curtain separating the sections and telling me my impoverished eyes don’t deserve to glance upon their champagne and slippers.

Don’t be like me. Put yourself in a business class seat and subscribe to First Class Founders for all of your entrepreneurial advice.

In case you’ve been living underneath a rock for the past week (or maybe out touching grass or something… idk what people with lives do), Y Combinator held its exclusive demo day for its Winter 2023 batch. The exclusive event is like The Masters: impossible to get a ticket to and full of some questionable fashion choices.

Invites are typically only extended to investors with a track record of supporting YC-backed companies. The list is even continually updated to reflect the most recent of investments, meaning that you have to shell out every single year for the ~privilege~ of hearing directly from the next batch.

Those VIP invitees probably left this year’s event with the desire to never hear the word “GPT” again, the result of 40% of the 260 accepted companies hailing from the AI/ML fields. The program’s 1.4% acceptance rate (more than 20K applicants) made Harvard look like one of the ‘Zona schools.

206 of the companies were based in the US, and 52% applied without an actual product and another 77% with no revenue. If you have a dream of being the next big YC success story and you’ve recently invented a time machine, you can use it to take you back two Fridays, the deadline for this year’s upcoming summer batch. If you’ve built a time machine, you prolly don’t exactly need their help to sell that, though.

It was hard to sort through this year’s batch and limit myself to one company to talk about. Well, that and there isn’t quite as much to say about these new-born giraffes of companies. So, to break up the monotony just a bit, I’m doing a brief breakdown of my favorite TWO companies. Cause who doesn’t want more dad jokes and the occasional market size stat?

First up is a company in a space that is near and dear to my heart: ZeroDev.

If you’ve ever created a crypto wallet, congrats. You’re part of the .0001% of people capable of jumping through the hoops required to do so. This unnavigable experience has been a large reason why the web3 space has failed to reach the audience that many have hoped for up to this point.

Many in the space (including Vitalik) have proposed a new standard which would allow for a process called account abstraction, a tool which allows for users to create smart crypto wallets using traditional authentication measures like email or social media.

This is far and away a better process for the user than the current seed-phrase-plagued process, and it could be a catalyst for driving the next 1 billion users to the crypto ecosystem. In addition to making the set up easy, it also allows the everyday experience with the wallet to operate more smoothly, too.

Developers have loads of flexibility with incorporating these wallets in their applications. They can choose to sponsor user gas fees or to allow them to pay this gas themselves. They offer Area 51 quality security. Plus, transactions can even be bundled to allow users to pay one time for a group of them rather than authorize and confirm every single microtransaction which can make things like in-game purchases more annoying than the literwy kid.

There are numerous other benefits and controls that taken together make the wallet experience 100000x better than it currently is, and if you want to read more on the topic, here’s a great article to help you out. However, as it relates to ZeroDev, the company makes money as a Smart Wallet as a Service operation.

SWaaS (we gotta chill with the “aaS” acronyms… we have more aa’s than a St. Patty’s day parade in Green Bay) takes the work of setting these wallets up out of the hands of developers, allowing them to focus on their products while still allowing their users to benefit from the convenience that is smart wallet operability.

The addressable market for account abstraction services is that of the traditional wallet market (which might be tough to disrupt entirely), but the real promise lies in the next waves of adoption from users drawn to the space by the improved experience. It’s already an $8.5 billion industry, and it’s growing nearly 25% every year.

The tech is still early enough that there’s no House Lannister yet. However, there’s an increasing number of startups emerging to provide this smart wallet service, including Gelato which is in collaboration with Base. Like the existing wallet landscape, there will likely not be one dominant company, so there’s plenty of time for ZeroDev to win.

The company was founded last year by Derek Chiang, an experienced developer in the space with past stints with the likes of collectibles company Eternal where he served as CTO and TenFold Protocol which he built and sold. The Cornell CS grad also has plenty of experience in engineering at other non-web3 startups, and these experiences make it very possible that he will be able to use his $500K from YC to capture a significant portion of this market.

TLDR: ZeroDev is a YC 23 company providing smart wallets as a service. This next generation of crypto wallets will have a 10x positive impact on the experience of users, and this company provides the tools for developers to incorporate this account abstraction in their products without the work of setting them up. Look for them to be part of the next billion web3 users.

Moving on, a quick reminder that life is bliss. Having sensitive company data compromised is not.

Luckily, another YC company is looking to make protecting this warehouse data a bit more Blyss-ful.

The company uses some abracadabra homomorphic encryption (to be clear, i added the abracadabra part) to protect user data. This allows it to scan for breached credentials, protect from malicious links, access blockchain data, and more.

Their service allows users to store information with a key that only they know, so not even the server learns the value associated with that key when retrieving it for the user.

For example, I could assign the key “Nevagunna” to a piece of data with the encrypted information “give you up.” When I go to access this data, I can use the key phrase to instruct the server what to retrieve, and it can return the encrypted data piece containing one of the most overrated songs in human history.

This allows developers to ensure that user data is actually protected when they incorporate Blyss’ service into their own product. The server never actually has access to the information contained itself. Even better, their work is open source, meaning that anyone can verify this encryption themselves.

However, this process is notoriously challenging, so nobody has been able to build something capable of living up to this “gold standard” of data protection. That is, until Blyss.

The market for companies attempting to provide encryption services is already above $10 billion, and with privacy violation stories dominating headlines on a weekly basis, the demand for these services is certainly not dwindling any time soon. In fact, the market is growing >15% every year. And that’s a market with inferior products than what Blyss is providing.

A few companies have emerged over the last few years which claim to be solving the same problem, but none has seemed to gain much traction. DataFleets, Picolo Labs, and Usencryption all fall into this bucket. While it’s likely that more will enter, the team has proven traction and the experience and expertise which points towards them being the ones to figure it out.

The SF-based startup was founded last year by Samir Menon and Neil Movva, two Stanford engineers who have since worked in various other software startups, including high-performance deep learnings at places like Apple and NVIDIA. This is essential experience for addressing the demand for Lightning McQueen-fast computers that can operate on the encrypted data itself.

Innovation like this makes me much more confident in a future in which we can utilize the benefits of the ol’ internet without the risks of having your precious data compromised.

TLDR: Blyss is revolutionizing the world of data security by allowing for safe storage of company warehouse data. The use of an innovative encryption technology allows the company to provide storage in which pieces of data are assigned a key, meaning only the user making the request and providing said key can access the contents of this data. This technology is considered the gold standard of data encryption, and it’s poised to pioneer the next stage of how companies manage their sensitive data.

Cheers to another day,

Trey