Despite the hype, YC's focus isn't just on pure AI startups. The accelerator is backing a diverse portfolio of companies in healthcare, finance, and deep tech, using AI as a disruptive tool to rewrite the rules of these traditional, 'dusty' industries, much like the internet did.
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While YC is often perceived as a B2B-centric accelerator, a significant portion of its latest batch and its most valuable alumni—like Airbnb, Reddit, and DoorDash—are consumer-facing. This suggests a persistent, successful, but often overlooked, consumer track within the accelerator.
A market bifurcation is underway where investors prioritize AI startups with extreme growth rates over traditional SaaS companies. This creates a "changing of the guard," forcing established SaaS players to adopt AI aggressively or risk being devalued as legacy assets, while AI-native firms command premium valuations.
When evaluating AI startups, don't just consider the current product landscape. Instead, visualize the future state of giants like OpenAI as multi-trillion dollar companies. Their "sphere of influence" will be vast. The best opportunities are "second-order" companies operating in niches these giants are unlikely to touch.
Instead of selling software to traditional industries, a more defensible approach is to build vertically integrated companies. This involves acquiring or starting a business in a non-sexy industry (e.g., a law firm, hospital) and rebuilding its entire operational stack with AI at its core, something a pure software vendor cannot do.
Instead of building AI models, a company can create immense value by being 'AI adjacent'. The strategy is to focus on enabling good AI by solving the foundational 'garbage in, garbage out' problem. Providing high-quality, complete, and well-understood data is a critical and defensible niche in the AI value chain.
In the current market, AI companies see explosive growth through two primary vectors: attaching to the massive AI compute spend or directly replacing human labor. Companies merely using AI to improve an existing product without hitting one of these drivers risk being discounted as they lack a clear, exponential growth narrative.
Don't underestimate the size of AI opportunities. Verticals like "AI for code" or "AI for legal" are not niche markets that will be dominated by a few players. They are entire new industries that will support dozens of large, successful companies, much like the broader software industry.
Periods of intense technological disruption, like the current AI wave, destabilize established hierarchies and biases. This creates a unique opportunity for founders from non-traditional backgrounds who may be more resilient and can identify market needs overlooked by incumbents.
Investing in startups directly adjacent to OpenAI is risky, as they will inevitably build those features. A smarter strategy is backing "second-order effect" companies applying AI to niche, unsexy industries that are outside the core focus of top AI researchers.
Traditionally, service businesses lack scalability for VC. But AI startups are adopting a 'manual first, automate later' approach. They deliver high-touch services to gain traction, while simultaneously building AI to automate 90%+ of the work, eventually achieving software-like margins and growth.