Y Combinator in Africa

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There is a lot happening in the Tech Safari world right now.

Last night we hosted an incredible Pitch Review Workshop with Raise and Launch Africa, with practical, live advice on how to nail your pitch.

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And next week, we’re hosting KYC 101 for Founders with two brilliant guests:

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If you’re a founder (or plan to be), you should be here. RSVP here.

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I’m in Tanzania 🇹🇿 next week for a well-needed vacation.

But in Tech Safari fashion, I’ll be hosting a little meetup on Thursday. Details coming at the end of the week, and you can RSVP here.

Okay - let’s get into the edition!

This one will be interesting. Not everyone is going to love it.

I’ve had early feedback saying it’s too neutral and others saying its a full takedown.

Honestly, I just want to tell it how it is and get important conversations going.

If you find it insightful, disagree with it or want to weigh in, I would love your comments on here.

Let’s get into it!

What do Airbnb, Stripe, DoorDash, and Coinbase have in common? They’re all alumni of Y Combinator.

And in Africa, “The YC Effect” rings loud.

Twice a year, African founders bundle their startup ambitions into an online YC application. They hit the green button that says "submit," and they wait.

If you slip through the slim acceptance rate, a Yes from YC is a HUGE deal.

First, you land a cool $500,000 into your startup.No crazy negotiations and no complicated deals.

Second (and more importantly), It's a chance to join the cool, successful club that has sprung from YC.

The likes of Nigeria’s Paystack. Algeria’s Yassir. And Senegal’s Wave.

Joining a club like that, your startup’s stock rises. Startups in Y Combinator get the buzz, money, and access.

But is that rise for a good reason, or is it all hype?

I think YC is a game of hype. It’s the ‘great distorter’ of Africa’s Venture Capital market.

While a hype machine is not a bad thing, there’s a problem when founders and VCs drink the YC Kool-Aid and forget about fundamentals.

I can feel the investors with YC Companies in their portfolio wincing at that one.

Today, we’re pulling back the curtains on how the players play the game. And where that leaves us in 2023, where capital has slowed down and hype alone can’t grow your company.

We’re stepping inside the hype train, strap in 🚂

What’s Y Combinator?

Y Combinator started in 2005, when Paul Graham wanted to create a better way to fund startups.

From the get-go, YC has had a simple rule: funding on standard terms.

Founders and their companies were given standardised terms and could focus on making things happen instead of getting lost in term sheet negotiations.

When founders get accepted into YC, they go through a 3-month program to sharpen up their business models and build a product ready to scale.

It all builds up to YC’s semi-ritual called "Demo Day.”

On Demo Day, founders pitch their startups to a hungry investor community, an eager press, and every other person in the startup and VC loop.

18 years later, YC has applied this playbook to more than 4000 companies.

They've backed startups whose total valuation topples $600 billion, backing winners like Airbnb, Stripe, DoorDash, and Coinbase.

And they've spread their wings into emerging markets like Asia, MENA ( Middle East and North Africa), and the rest of Africa.

Africa Meets YC

In Africa, Y-combinator's footprint traces back to November 2016.

The accelerator was almost a decade old. But Africa's tech ecosystem was only taking its first steps.

Back then, there were only a handful of tech startups. And venture funding was at less than $400 million.

Things changed when Africa had its first company join YC. This was Paystack.

Shola and Ezra, Paystack’s co-founders, were accepted into Y Combinator's Winter 2016 batch.

They were building a payment gateway for Nigerian merchants to accept local and international payments.

Pitched as ‘Africa's Stripe,’ Paystack officially brought YC into Africa’s startup scene.

And in 2020, Africa and YC really hit it off. Stripe acquired Paystack for over $200 million.

The marriage of two of YC’s (most successful) alumni caused ripple effects through the ecosystem.

Paystack’s founding team has gone on to create a couple of YC-backed startups in Africa, like Mono, Grey (YC W22), Chowdeck, Moneco (YC S22), Bujeti (YC W23).

And it’s not just Paystack’s alumni.

Since 2016, more than 90 African startups have made it to Y Combinator. And YC has ventured beyond Nigeria into 16 African countries. Some quick stats on YC’s portfolio in Africa:

• More than half (51) are based in Nigeria, followed by Egypt (11), Kenya (7), and Ghana (5). Overall, 16 countries are represented.

• These startups have raised $1.5 billion (inclusive of Paystack's $200 million acquisition).

• The dominant sector is fintech (43%), which is much higher than YC's overall portfolio (12%).

• Most of the African start-ups (54%) joined the portfolio in 2021 (25) and 2022 (24).

And startups love it.

Jesse Ghansah, (CEO of Float) explains "YC gives the network of founders and the network of investors. Once you get into YC, you're immediately plugged into this Matrix."

YC is the ultimate accelerator. It gets founders buzz, money, and access.

But in Africa, it’s a game of hype that VCs and founders play. Let’s pull back the curtain a bit.

Kyane Kassiri (Partner at RaliCap VC) has a great series of tweets we will use to unpack YC, and I hopped on a call with Kyane to go a bit deeper.

To understand the great hype game, let’s talk about when the deals get done.

Exporting Silicon Valley

Recall the Demo Day?

It’s when YC Graduates pitch their startups to a host of global investors. If you had to measure ‘hype’ through YC, demo day is easily the peak.

Investors from around the world come along to YC’s demo day.

Term sheets (investment commitments) are circulated (and even signed) before the founders pitch.

If you’re a founder making the most out of your YC hype, you are probably making the most out of Demo Day.

And for global investors who want to enter Africa, it’s a shortcut. Most investors use Demo Day to gauge which startups to invest in.

Now, if you’re a global investor with limited experience on the continent, you’re probably more likely to invest in what you understand.

Stripe for Africa? Yep, that checks out (and actually worked) with Paystack and Flutterwave.

Brex for Africa? Sure, why not. See Bujeti here.

DoorDash for Africa? DoorDash is valued at $35 billion - of course. Here’s Chowdeck, BeU, and Foodcourt.

Sometimes this works - but we have seen the impact that taking a Silicon Valley to Africa can have.

In Africa, you have to meet people where they are.

Companies like Opay ($2B valuation) and Moniepoint (processing $100 billion in 2022) started with attracting offline mass markets first.

This involves distributing PoS devices at scale, having teams of agents on the ground to distribute.

And should we blame YC and global investors for skipping these companies and admitting companies they know and have seen work?

Perhaps not. But it’s clear there are blind spots. And it also drives this point home.

While founders love the idea of global capital from YC, the real players whose mouths water over this aren’t startups - they are VCs.

The Hype Game

Any good founder knows how to tap into hype to drive an outcome for their raise.

Which is why VCs like YC startups. Even Kyane does.

It might sound like I’m bashing ‘hype’ - but they’re essential components of a raise. As a VC, you want your founder to use hype to close their round.

And the first investor in a startup has the most to gain from that momentum and hype.

Why? Let’s talk about VC and incentives quickly.

The common perception is that the ‘customer’ of a VC fund is the startup or founder. It’s not.

It’s actually the next investor in the chain.

Pre-seed funds sell to seed funds.

Seed funds sell to Series A funds.

See where this is going?

The further up the chain your startup goes, the higher the valuation.

The higher the valuation, the better returns that your fund has (on paper, at least).

The better the returns, the more money you can raise for your next fund.

And if you haven’t caught on yet..

The more money you raise for your next fund, the more you can pay your team and yourself in management fees. And the more money you can return to investors (and get a nice slice of).

Just like how a startup wants to grow its valuation and size, VCs want to raise more money and grow their fund size.

Now, back to YC.

In a market where global capital for African startups has previously been hard to come by, YC has been the leg up that local investors needed.

An almost guaranteed markup.

Plus, it’s from global investors who use to pick out the companies they think are Africa’s best.

It produced the momentum and hype necessary for a company to raise their next round.

You could say that YC was the perfect tool for investors. In turn, investors optimised from that tool.

And while that worked over the last few years, it also put pressure on YC Alumni to hike up valuations and make the most of the hype.

In 2023, that hype game has hit everyone hard. Funding is down, and investors have (hopefully) moved away from hype and over to capital efficiency.

A lot of global investors that held up Africa’s funding growth in 2021 and 2022 [like Tiger and Softbank] aren’t coming back to Africa for a while (if they come back at all).

Startups have moved away from hype and towards sustainability.

And when fundamentals go out of the window and startups have to come back to Africa and pitch, there’s a big reality check.

Just ask your local investor with YC Companies in their portfolio whether any of their companies have raised a down or flat round.

And Kyane points out another big problem with the YC Effect in Africa.

Founders who get into YC take a valuation jump and leave their potential local supporters on the ground.

When you start with a 3-4 million valuation and jump up to a 15 million+ valuation, most local investors won’t invest in your startup.

Your investors become global investors without much to lose, or opportunists who want to ‘test out’ Africa.

But it’s the folks on the ground who will actually help you build.

Can a global investor venturing into Africa help you build a sales team on the ground?

Provide expertise on Africa’s logistics space?

Can they land you a banking license? Connect you with local partners for your company?

Probably not.

The important people who will help you build are priced out.

And you’re stuck with global investors who, at best, can invest more capital.

When Kyane talks to founders now, he wants to see intentionality around how founders structure their round and set up their cap table.

And he explains that the second-wave effects of YC valuation hikes are being felt now.

When YC startups go out to raise their down or flat rounds today, global Venture Capital funds will view those companies as the ‘Africa Opportunity’ failing.

They will blame it on the continent, and they won’t come back.

This is why we need a bit more realism on what the Africa opportunity really is, but that’s for another edition.

But does that even matter for VC’s whose companies get into YC?

Kyane makes a great point.

Checking the Cap Table

And a layer deeper, we see that YC is a game that’s more skewed in the favour of a handful of funds.

You may have seen this guy around - Michael Seibel.

Meet Michael Seibel. He’s the Managing Director of Y Combinator and former Co-Founder of Twitch. At this point, you could say he’s synonymous with Y Combinator.

Michael also invests in funds. A lot of them, actually. He’s invested in Ingressive Capital, Ventures Platform, and Microtraction (and potentially others).

These three funds are based in Nigeria.

And when we look at where YC startups are distributed, we see that more than half are in Nigeria (51).

This doesn’t represent where venture funding actually goes in Africa, which is an almost even split between Nigeria (25%) and Kenya (24%), followed by Egypt (18%).

Recall that as an investor in a fund, you want your portfolio’s value to grow and raise more.

YC’s hype machine is almost a sure-hit when it comes to markups.

And having Michael incentivized to push your startups through Y Combinator - that’s a pretty big advantage as a VC.

But is it a conflict of interest?

Kyane put it nicely, but a lot of other VC’s think so (and had a lot more to say).

Y Combinator in Africa makes me ask:

Should we blame the players or the game?

Kyane calls Y Combinator a distorter of Africa’s VC market.

I’d agree with that.

But I think YC was essential for Africa’s ecosystem to grow. It’s a hype machine. Investors and founders play the game.

If you can stack the odds in your favor (like having Michael Seibel on your cap table or getting your portfolio into Y Combinator), you should.

I definitely would.

But I think Y Combinator will only be sustainable for the ecosystem if founders are sober.

The toxic traits of YC come out when founders (and investors) play the game without thinking about fundamentals. Fundamentals like:

• Building a product that actually works in Africa (and not a Silicon Valley export)

• Thinking clearly about what valuation makes sense for this and the next few raises.

• Building with the right partners on the ground and not skipping the important allies that will actually help you grow the company.

Founders and investors drinking the YC Kool-Aid will stay in their bubble and feel the repercussions (if they haven’t already).

Hype is the real product of Y Combinator. When founders and investors drink the Kool-Aid and throw discipline out of the window is when things go wrong.

But the real marker of a great investor and founder is discipline.

What do you think? Is YC’s Hype Engine helpful or harmful for startups in 2023? And did anything in here surprise you?

Let me know here 👇🏾

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👋🏾 Caleb’s