Y Combinator’s latest A group of entrepreneurs have their views on the future of fintech. A fifth of the accelerator’s summer 2022 batch, which spans 240 companies, is working to solve problems in the financial sector. Pitches range from building a square for micro-entrepreneurs in Latin America to creating a way for angel investing in your favorite athlete.
While the pitches varied, some concentrations showed key ways a vetted group of entrepreneurs was thinking about the changing landscape in light of nuanced venture markets, downturns and some public market meltdowns. Unsurprisingly, the most popular issue area among the fintech cohort of this batch is payments. The story really begins with the story of the second runner-up with a focus on Neobanks.
Thanks U, Neobanks
This year’s cohort includes 11 neobanks, something we’ve seen take off with YC’s W22 cohort, which also includes 18 such companies. This is a significant increase from the 1-2 neobanks per batch that made the cut for YC in both 2020 and 2021, indicating that the accelerator is doubling down on entrepreneurs aiming to build the next “one-stop-shop” for fintech services. .
The founders Neobank chose to back this summer have a very specialized knowledge of niche markets, giving them the ability to capture the overall wallet share of a specific demographic they know best without trying to cultivate a broader but perhaps less deep appeal. About half of the neobanks in this batch are based in the United States, while the rest are spread across the UK, Switzerland, India, Nigeria, Senegal and other geographies.
Lagos, Nigeria-based Pivo is focused on freight companies in Africa, Hostfy is looking to capture the market for short-term rental hosts, and Pana says it’s targeting the 62 million Latinos living in the US, to name a few examples. Latest batch. The three companies were founded by a Nigerian port operations manager, an Airbnb superhost and a LatAm-focused digital banking executive, respectively, with these founders demonstrating a deeply focused approach to more niche segments of the market they have prior experience with.
YC’s focus on neobanks is somewhat at odds with the general fintech sentiment these days. Why neobanks — albeit low-cost, savvy banking solutions — don’t work well: Despite mega venture rounds, there are big risks. Stronger growth is possible, but often at the expense of higher operating costs.
Still, while some in the sector see big losses as the end of neobanks, Chime offers hope. The well-known Neobank became EBITDA-positive at the end of 2020, signaling that the conglomerate could reach a state of financial health and shutting down some criticism. However, the world of banking is an increasingly competitive space, with practically every fintech company fighting for a share of consumer wallet. Neobanks are unlikely to be winners of all – instead, more specialized upstarts are better suited to meet the specific needs of a given community in a holistic way. And this batch supports that realization.
International fintech is a key focus
India has always been Y Combinator’s favorite geography for investments outside the United States. The last batch, YC’s India founders are mostly concentrated in the financial services sector, about 30% when you consider that 11 out of 36 Indian startups are in the fintech world. This is a contrast from previous shows, in which most of the YC startups in India fell into the B2B services category.
While last year’s focus was more on fintech, this year’s courses have been slightly reversed. Of the 21 YC-backed startups in India, around 40% or 8 startups are in the fintech segment. Fintech is still a big focus, but B2B has taken the lead in geography: 47% of YC’s India startups are focused on the enterprise world this year.
A slight shift away from Indian fintechs doesn’t mean YC cares less about fintech startups globally. The accelerator backed eight fintech bets in Latin America, worth 57% of its total bets in the region this season. Latin American fascination with financial technology continues, perhaps supercharged by the success of high-profile Brazilian neobank Nubank, which went public and officially became Latin America’s most valuable listed bank late last year.
It’s a similar story for African fintech, with five of the accelerator’s eight investments working in the fintech space. Anchor, a remote banking-as-a-service platform that has already raised over $1 million for its platform, includes Bridgecard, a card issuer for Nigeria, and Erad, a non-dilutive funding platform for Middle East startups.
The future of friendly investment regulations
Despite some slowdown in fintech funding for private companies this year compared to the ultra-hot 2021 market, the sector is hotter than in previous years, accounting for nearly 21% of all venture deals by Q2 2022. Pre-seed follows the same trend as late-stage businesses like YC Stripe or publicly traded fintechs like Robinhood and Affirm are currently unsustainable.
Here’s a look at the percentage of fintech companies in the accelerator’s past few batches:
As with any sector, we can see competitive tensions within the accelerator itself depending on where the startups go. A feud erupted earlier this year when crypto startups Echo and Pebble, both YC participants, accused Pebble’s founder of “copy-and-pasting” important parts of his company.
The entire fintech space is a bloodbath right now, as the market is saturated with companies playing in the same areas trying to fight for the same customers. YC’s startups are no exception – only time will tell if their approach of focusing on international companies operating in niche markets will pay off, or if consolidation in the sector has already gone too far for new upstarts to see breakout success.