Y Combinator's Demo Day 2019. Photo: Albert Law/Courtesy/ File Photo.

A look inside Y Combinator’s seed-funding engine for Latin America

LABS sat down with Y Combinator’s head of admissions to discuss its wildly successful accelerator program and the growing herd of global unicorns it has helped birth.

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When it comes to seed-funding success stories, Y Combinator (YC) certainly has the Midas touch. 

The Silicon Valley-based accelerator has invested in more than 3,000 startups since it first opened its doors in 2005. Since then, more than 60 YC-backed companies have achieved unicorn status (valued at over $1B), and the total valuation of the growing number of YC alumni startups is fast approaching $1T.  

As global private equity firms and VC heavyweights like Advent International, Softbank, and Tiger Global have begun pouring millions of dollars into the Latin American startup ecosystem, YC has increased its early-stage funding footprint in the world’s fastest-growing region for venture funding. According to recent Crunchbase data, the company is by far the most active seed investor in LatAm, minting 65 deals in 2021 alone.

Last week YC released an update to its Top Companies list – a semi-annual ranking of companies in its portfolio with valuations of over $150M. Eight LatAm alumni have reached that milestone so far, with Colombia’s delivery unicorn Rappi at the top of the leaderboard at #21 out of the 260 companies ranked. Belvo and Kovi of Brazil and Chile-based Fintual and Houm joined the list for the first time, along with newcomers Fondeadora and Nowports of Mexico.

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The Y Combinator Approach

YC keeps its global pipeline of talented founders full by running its flagship accelerator program twice a year. The company receives more than 30,000 applications for its world-renowned accelerator program annually, and accepts about 2% of them, or roughly 400 startups per “batch.” Founders selected for YC’s program receive $500,000 in seed funding and spend three months intensively collaborating with the group’s partners and advisors who are dedicated to supporting their needs. 

YC packs a ton of entrepreneurial learning and networking into a short timeframe. Participants are encouraged to meet with their advisors and mentors as often as they like to discuss the strategic, tactical, and technical issues each startup is facing. They have the added benefit of direct access to YC alumni, and are invited to weekly off-the-record talks with other successful founders and investors. The program also includes special boot camps held by industry experts in critical subjects for startup success such as sales and growth. 

Most important, YC participants learn how to effectively pitch their startups to investors, and how to close a deal once they’ve generated interest. Each three-month program ends with Demo Day, when founders present their companies to an invite-only audience of potential investors who can help support the next phase of growth for their startups.

READ ALSO: Y Combinator-backed, Chilean Instacrops wants to conquer Latin America’s farmers with its “internet of plants”

LABS recently spoke with Stephanie Simon, head of admissions at Y Combinator to learn more about its famous accelerator program and what’s next on the horizon for its LatAm investment strategy:

Stephanie Simon, head of admissions at Y Combinator
Stephanie Simon, head of admissions at Y Combinator. Photo: Y Combinator/Courtesy.

Bonny Renner: What makes specific founders and investments attractive to YC?

Stephanie Simon: We consider startups in any field – and have funded companies that make everything from microbes to fusion reactors to supersonic airliners. As for what we look for in applications, we like to see that the team has the ability to build. Often that means having a technical founder, having a track record of building, or evidence that you can build an incredible team around you to help execute. When building in a highly-regulated industry like financial services, it’s helpful to have some domain expertise.

BR: What can you say about the quality of LatAm-based startups applying to the YC accelerator program? Do they have strong leadership teams?

SS:  Whenever we’re deciding whether to fund a startup, we are most interested in the team – specifically their technical skills, evidence they can build, and how well they work together. We look for ideas that have the opportunity to become large companies if the business succeeds, but this is secondary to the leadership qualities of the founders.

We’ve seen an increasing number of applications to the YC batch program from founders in South America. Even more significant is the caliber of teams applying from Latin America continues to increase. In 2019, we funded 22 companies from LatAm. In 2020, we funded 30. And in 2021, we funded 83 of them. 

Stephanie Simon, head of admissions at Y Combinator.

We find that when we fund successful companies, like Brex and Rappi, there’s a flywheel effect where they inspire locals to start a startup — and we’re seeing this in LatAm. We believe that going remote due to the pandemic has contributed to increased interest. Founders who may not have been able to make the temporary move to [California] for three months – something we previously required – are now applying to Y Combinator.

READ ALSO: Y Combinator’s first major round in Brazil, Conta Simples brings together neobank and SaaS

BR: Do any specific sectors stand out among your LatAm applicants?

SS: About 40% of the companies that we have funded from Latin America are building in the fintech space – which is unsurprising. There is a huge demand for financial services in the region – digital services are lacking, huge swaths of the population are unbanked, more businesses are going online and switching from cash to card-based payments, and so on.

BR: What does LatAm need to support a steady pipeline of startups?

SS: Successful startups create the demand for a healthy startup ecosystem like strong computer-science programs, good seed investors, open APIs, and more, which in turn further encourages and supports entrepreneurship.

BR: How is YC’s funding strategy evolving, and what are the future plans for LatAm?

SS: As of January 2022, we implemented a new “standard deal” for our founders. When a company is accepted into the YC batch program, we now invest a total of $500,000. We still invest $125,000 for 7% ownership in the startups,  and we now invest an additional $375,000 on an uncapped safe with a most-favored-nation clause (or MFN, which protects early investors by giving them the same rights and benefits received by later investors, if those rights and benefits are more favorable than those originally agreed to.) 

Prior to this, we invested $125,000 for 7% equity on a post-money SAFE (or simple agreement for future equity, which effectively “locks in” the percentage of the company an investor will own when a portfolio company converts their SAFE into shares.).

We have been investing in the later stage rounds of our alumni startups since 2015. These are the high-growth companies that have received between $15M and $300M or more in funding from YC.

Rappi is one of these companies, as well as Brex.

In total, we have funded nearly 200 companies from Latin America, and we have no plans to slow down. We believe that talent is everywhere in the world and our goal is to help promising founders build world-changing companies no matter where they live

Stephanie Simon, head of admissions at Y Combinator.