Is Y Combinator Losing Its Grip On Indian Startups?

For the past several years, Y Combinator (YC) has been a means to success for iconic startups in India — unicorns such as Razorpay, Clear, Meesho, Groww and Zepto, to name a few. But in the last couple of years, the famed early stage accelerator has seemingly dulled its focus on India, with just a few Indian startups getting the YC tag in the latest cohort.

The data for the Y Combinator Summer 2023 batch shows that this is the lowest participation by Indian startups since 2020.

Some of this could be down to the changes in Y Combinator’s standard deal (more on this later). But there’s also the factor of Indian startups answering the call for companies to have their primary registrations in India, something that was not always possible when going through the Y Combinator route. Indeed, YC has faced some backlash in India in the past over allegations that it nudges startups to register outside India, something the firm has denied.

At the same time, the relevance of a Silicon Valley accelerator or institution is fading with the rise of the early stage ecosystem in India. This is especially true given that YC cohorts have grown larger and larger over the past few years. So, clearly, many founders are asking themselves: is Y Combinator the same multiplier force it used to be a few years ago?

Y Combinator’s Shrinking India Focus? 

The Y Combinator Summer 2023 (S23) batch features just six Indian startups, where founders are either based in India or have Indian educational backgrounds, even though many of them were already employed in the US before entering the Y Combinator process with their startups.

The low participation is in stark contrast to the dozens of startups that have been part of past cohorts.

Overall, 218 startups are part of the S23 batch, and a number of these have Indian-origin founders with roots and educational backgrounds in the US.

Bengaluru-based fintech startup CheqUPI is the only startup in the cohort that is registered in India, while the other five are either already registered in the US or are likely to headquarter there.

The list does not include Medobed, which was originally supposed to be part of the S23 batch, but was removed by Y Combinator after the firm discovered irregularities at the startup, as per reports.

Incidentally, Medobed does not feature on the YC website despite there being no official confirmation of its ejection from the batch.

As with Indian startup funding at large, Y Combinator’s India focus peaked in 2021 with a total of 74 startups across two batches. Since then, the yearly count has been 40 in 2022 and now 18 in 2023. This tally is even lower than 2020, when a total of 38 startups made it to the two batches in that year.

A Y Combinator spokesperson told Inc42 that the accelerator programme going back to the in-person format has had some impact on the number of Indian startups.

“We ask all our founders to move to the Bay Area for the 3 months of YC. After the batch, they’re encouraged to move wherever makes the most sense for their company. Many companies whose founders were based in India at the time of application might be currently based in San Francisco, as the S23 batch hasn’t finished yet. That might be one reason you’re seeing fewer companies tagged as India in this batch,” Y Combinator said.

It must be noted that the Summer 2023 Demo Day was held earlier this month.

The spokesperson added that because the YC batch is back in person, international founders have struggled to participate because of their inability to get visas, citing the example of GigaML, one of the six Indian startups in the S23 cohort.

“The founders had to do office hours over Zoom because their visas were denied twice by US Immigration. Founders want to come to the US but can’t, and for that we need policy change.”

Has New YC Standard Deal Spooked Indian Startups?

One major factor for the lower representation from India could be the changes in the Y Combinator standard deal circa January 2022.

Y Combinator revamped its original standard deal from $150K, with a $10 Mn valuation cap, to $500K as a SAFE note with no valuation cap and a contentious most favoured nation (MFN) clause.

As we wrote at the time, the $500K will be invested in two ways:

• The first part is a straightforward equity deal where Y Combinator will invest $125K for 7% of the startup.
• Second, it will now also offer $375K in the form of an uncapped SAFE note, which also carries a “most favoured nation” clause.

The most favoured nation (MFN) clause means that Y Combinator gets the best possible deal in any future priced round, or in other words, as good as any other investor in a later conversion. This is the part that has alarmed some investors and founders the most.

At the time, investors told Inc42 that while $500K feels like more money for a startup, founders would potentially be giving up a lot more equity. From around 7% dilution under the old standard deal, the new deal meant startup founders would have to potentially forgo up to 16% of equity to YC even before raising the first major round.

It’s one way for YC to ensure that it sees exits at an earlier stage from the bets that do work.

“The signalling is clear YC wants to own the largest piece of equity with every startup they invest in and angel investors, micro VCs are not welcomed. Going to YC for Indian startups is no longer attractive with new terms,” Sanjay Mehta, founder and partner at 100X.VC, told Inc42 earlier.

Indian VCs Close The Gap

Among a growing class of micro VC funds, Mumbai-based 100x.VC invests in Indian startups through convertible SAFE notes, similar to what YC offers. But even in straight equity deals, the early stage ecosystem has seen a rapid shift, with a host of micro VC funds joining the market.

Well over $4 Bn comes from funds that have been announced in 2023 alone and a bulk of them are focussed on the early stage.

Plus, even larger funds such as Peak XV Partners, Accel, Tiger Global (in 2022) are chasing the early stage upside. Some of these larger funds with an early stage focus also have accelerators similar to YC. In the past, these VCs were more than happy to let Y Combinator signal the right deals, but now they are taking on this responsibility themselves.

Of course, selection in Y Combinator or indeed any other large early stage accelerator is not a guarantee of future fundraise. Often, startups that come through this route are forced with tough existential questions if they fail to get a follow-up round from YC, or Peak XV or Accel after their entry into Peak’s Surge or Accel’s Atom programmes.

The growing need for domestic capital is also because founders find it typically less expensive to raise from Indian AIFs in the long run and the money typically comes in faster than international remittances. It’s not been a kind year for YC, but Indian early funds are clearly quite bullish even now about their dealflow.

Reverse Flipping Sentiments On The Rise

Interestingly, the drop in Indian representation in Y Combinator batches in 2022-23 comes amid growing calls for startups to register themselves in India and ‘reverse flip’ from overseas HQs.

PhonePe’s move back to India earlier this year is said to have prompted Razorpay, Meesho and Groww to also explore redomiciling to India. Incidentally, all three are Y Combinator-backed unicorns. PhonePe is said to have had to pay $1 Bn in taxes when moving to India.

Even if they wanted to, arguably, very few Indian startups can afford to open themselves up to huge tax bills in the future. As a result, startups are increasingly preferring to register in India, aided by revamped regulations.

In the past, investors have raised concerns about Y Combinator more or less forcing Indian startups to register overseas for ease of compliance, but lately, a ‘reverse flipping’ sentiment is running through the Indian tech and startup ecosystem.

Even government committees have made recommendations to arrest flipping of startups and bring flipped startups back to India. The GIFT IFSC is being seen as a key enabler to keep Indian startups from moving abroad for tax or compliance purposes, especially those that are offering global products and services from India.

YC’s Vast Portfolio

Another criticism for Y Combinator in recent years is the large size of its cohorts. In an interview in December 2021, YC president Geoff Ralston said YC batches could even have 1,000 startups in the future.

In 2022, YC’s two batches had over 320 startups each, but this has been reduced to a total of 489 in 2023. Even with the drop, those are staggering numbers.

Questions naturally come up about dealflow or YC’s application pipeline. Or is it just that the accelerator has tightened its filters for each cohort in the light of the overall slowdown?

The early stage startup also issued advisories to founders in March last year on how to ensure that their startups survive the global downturn in public markets. YC said it met portfolio founders to discuss the course of action to prepare for the market slowdown. “The safe move is to plan for the worst,” Y Combinator said at the time.

Besides this, Y Combinator laid off 20% of its workforce in March 2023. How is the famed accelerator programme supporting such a large cohort — this has been a specific criticism for YC in the past.

But now that the cohort sizes have shrunk, has YC gone back on its thinking around large cohorts and has this also affected its India thesis? It would be interesting to see the next cohort which should come out around March 2024.

The limelight and relative success of YC graduates such as Meesho, Groww, Clear Khatabook, Razorpay, Zepto and others till 2021 made Y Combinator one of the most coveted destinations for Indian startups and founders. In contrast, things have changed quite a bit in 2023.

Is this down to YC’s less-optimistic India outlook or is it Indian startup founders that are actually turning away from Y Combinator?