Is the “cult” of Y Combinator a good or bad thing for Africa’s startup ecosystem?

Is the “cult” of Y Combinator a good or bad thing for Africa’s startup ecosystem?

Last week, 10 African tech startups took to the virtual stage for Y Combinator Winter ‘21 batch demo day, pitching to an audience of investors, press, alumni, and other interested parties.

The Silicon Valley-based Y Combinator (YC), perhaps the world’s most famous accelerator, is increasingly selecting African tech startups to take part in its programme, and its alumni features continental royalty such as Flutterwave, Paystack and Kobo360 (not to mention Cowrywise MarketForce, Kudi, WaystoCap, WorkPay, Healthlane, Trella, 54gene, CredPal, NALA and Breadfast – according to YC 47 African startups have gone through its programme so far).

Yet the accelerator occupies an ambiguous position within the continent’s startup ecosystem, at once bringing in necessary funding and attention, but also potentially being the cause of wider issues due to its selection of startups without applying local knowledge and its adversely affecting valuations and local investor confidence.

A dangerous “cult”?

The debate around the good and the bad of Y Combinator, and what the accelerator means to the African startup ecosystem, was reignited last week by a series of tweets from Kyane Kassiri, a VC with Lateral Capital and RallyCap Ventures, which prompted much discussion within the ecosystem.

Among other things, Kassiri questioned YC’s judgement on what African companies to invest in as it lacked local context, and suggested a lot of “FOMO money” was being thrown at YC companies, many of which are “ridiculously over-valued” on demo day and experience a bit of a reality check once the hype dies away post-programme.

“Founders are annoyed by YC puppies: low conviction investors who’ll delay taking a decision until YC jumps in first,” Kassiri tweeted.

“Local founders/investors are annoyed by the gate-keeping role that YC is unintentionally playing. This role is being reinforced by market-ignorant – often foreign – investors,” was another.

In addition: “Also, many consider that the amount of money being thrown at YC companies might have been more beneficial if invested in “the truly great companies that are silently building”. I don’t disagree. YC is a cult. But I’d rather analyse behaviours than simply condemn them.”

In analysing this, Kassiri did allow some mitigating factors, explaining why investors that follow YC’s lead behave as they do, while also suggesting that this will change over time.

“For a US VC firm who doesn’t have a dedicated Africa team, they consider the Africa YC companies as the low hanging fruits. You might consider this as “lazy”, but that’s how things have been done until now,” he said.

“This will hopefully change in a future where big firms will open local offices or hire dedicated Africa teams, but as of today, I don’t blame them for looking at YC batches first, before digging deeper into the market. Wouldn’t you do the same if you were in their shoes?”

Deeper value?

Looking at the African startups that have taken part in the programme, and how they have fared since, suggests there is value to the programme. In general, research suggests that startups that go through accelerators are four or five times more likely to be successful than those that do not, and YC is especially well-reviewed. Jesse Ghansah rates it to such an extent that he has been through it twice, most recently with fintech startup Swipe (and previously with OMG Digital).

“Beyond the US$120,000 that YC gives you, you also get access to US$1 million in software credits and deals. There are so many deals that YC companies can access. For us, for example, we have not had to pay for our cloud or server costs for the past year. People don’t really factor that in when they talk about the YC percentage,” Ghansah said.

In fact, he questions whether deals like the Paystack acquisition by Stripe could ever have happened if it wasn’t for YC.

“The core value YC gives is the network of founders and the network of investors. Once you get into YC, you are immediately plugged into this matrix.”

Eghosa Omoigui is the founder and managing general partner of VC firm EchoVC Partners. He believes there are undoubted advantages to startups selected to take part. 

“Looking from the outside in, the access to venture dollars and an undisputed network, albeit mostly in the US but expanding, is valuable,” he said.

Peter Ngunyi, founder and chief executive officer (CEO) of EarlyBird, a Kenya-based investment catalyst and venture lab, says YC brings more to the table than many give it credit for.

“While we dream of in-continent local capital like pension funds, local capital at scale is still in the pilot phase. Hopefully five to 10 years down the road we can have a lot of local capital. However, our companies can’t wait for a dream, they need funds today to grow. So they should say yes to sensible partnerships,” he said.

“Africa is full of impact investors who unfortunately take ages to write cheques because you have to pass both commercial and impact due diligence. I think YC is more in tune with the commercial startups in Africa than the “poop, power, people” investors,” he said.

Not a silver bullet

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Yet getting into YC is no guarantee of success, as Ghansah will tell you (his first startup, OMG Digital, failed in spite of taking part in the accelerator).

“If you are not ready, if your company hasn’t reached product-market fit, or you’re still discovering and fleshing out the product, it can force you to do unnatural things to your company,” he said. 

“Because there is a lot of peer pressure in YC, you are put in groups and maybe your group members may be doing better than you, so it is a rush to grow as fast as possible to get more traction at demo day. People fall into that trap of doing unnatural things that could end up hurting you long-term, and I’ve seen that a couple of times with African companies.”

And while the goal of most YC participants is to swiftly raise a funding round after demo day, the post-programme experience can prove challenging.

“Post-YC for African companies there is a lot of pressure. You went through YC and you probably raised some money, so everyone looks up to you. There is still that pressure to deliver,” Ghansah said.

And if you didn’t manage to raise?

“It can also be a red flag for local investors if you didn’t raise. Maybe there is something wrong with your company, they might think, so that can be an issue.”

Omoigui agrees with all this, and said the reliance of some African founders on YC participation as a means to raising their first round can be damaging.

“African founders may see YC as the lifesaving, possibly sole, and frat-badged source of investor funds and thus organise, optimise and package themselves to be YC-eligible rather than truly focusing on getting to product-market fit and delivering customer value, which can be rough,” he said, adding that once funding sources expand, and founders start to believe they have funding optionality, he expected things to change.

Let’s go back to the series of tweets from Kassiri, who said “not getting into YC doesn’t make you a bad company, and getting into YC doesn’t make you a good company”. Omoigui agrees there are many companies that won’t take part in YC, and yet will be hugely successful. 

“The outcome may be delayed because they don’t get to enjoy the YC funding halo, but success will still happen. The big problem is that the market is optimising for access to funding. Once the aperture is opened, things will change,” he said.

The original signaller

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Every ecosystem needs someone to do its signalling for it at various stages, in order to attract global capital, and at this early stage YC is providing the signalling for the African tech space, rightly or wrongly.

But that should change. As more money comes into the ecosystem, other investors should start to fulfil that role, as First Round and a16z do in Silicon Valley, but over-reliance on YC is a stage the ecosystem needs to pass through.

For now, YC is a serious force to be reckoned with on the continent, especially as it scales up its African engagement through virtual programmes. From the perspective of access to funding and networks, this is not a bad thing, but in the medium to long term, getting local capital into African tech startups has to be the goal. 

That is why deals like the US$10 million recently received by South African VC firm Knife Capital from the Mineworkers Investment Company (MIC) for its new African Series B expansion fund Knife Fund III are such milestones. More deals like this are necessary for the ecosystem to develop, and become less reliant on external forces like YC.

Check out our Q&A with YC’s Michael Seibel here, and stay tuned for articles on what former participants have to say about the value brought to their business by the Silicon Valley accelerator.

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