In April, 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).
The accelerator occupies an ambiguous position within the continent’s startup ecosystem – Disrupt Africa recently delved into the positives and negatives, and also briefly chatted to Michael Seibel, YC’s managing director for early stage and group partner. Yet what do founders have to say? We chatted to a few, and here’s what they had to say. Spoiler, they are pretty glowing reviews.
Disrupt Africa: Is YC a good bet for African startups? Is seven per cent too much to give away for some? What is the value the accelerator adds?
Tesh Mbaabu, co-founder of Kenya’s MarketForce (YC S20): “Absolutely. The instant that your name is mentioned alongside YC, there is immediate recognition and attention that one gains. Instead of looking at it as giving away seven per cent, we look at it from the angle of “what did the seven per cent buy us?”. We plugged into a global network of investors, some of who invested in us right away. Second, YC is a world-class accelerator where you learn and execute so much in a very short amount of time. For us, we plugged into a fraternity of YC companies and founders that we have learnt so much from. Some even invested in us. Additionally, we are forming partnerships that help us with our traction and market expansion.”
Jesse Ghansah, founder of Nigeria’s Swipe Technologies (YC W20), a two-time YC founder having also participated with OMG Digital (YC S16): “I think seven per cent is pretty fair. It is on par with a pre-seed valuation, around US$1.9 million, and that is what African startups are used to raising for a pre-seed round. So I think for African businesses that is a really fair deal.
“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.
“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.”
Paul Kimani, CEO of Kenya’s WorkPay (YC W20) “YC is one of the best startup programmes globally. Startups across the world want to be part of it, and it’s no different for African startups. Before joining the accelerator, the terms are clear and publicly available. You know what you are getting into way before you apply. Each startup has to individually evaluate the benefits and judge for themselves.
“One of the biggest benefits of YC is its community. The community has founders who are at different stages of their company development, from very early stages to exits. Being in such a community is invaluable. The other benefit is the funding which for some startups is the first cheque they receive. Exposure to the investor community is also another huge benefit.”
Razaq Ahmed, co-founder of Nigeria’s Cowrywise (YC S18): “I believe it is a fantastic bet. Given the stage of most African startups that have gone through YC, seven per cent does not appear too much to give in exchange for the value realisable for being a YC company. YC is a strong ecosystem with super-sized leverage for access to investor networks, startup resources/knowledge base, founders from across the world, and the life-long support it gives to startups.”
Fehintolu Olaogun, co-founder of Nigeria’s CredPal (YC W19): “Y Combinator is highly respected in the African startup ecosystem with strong investment sentiment from local Investors and the general stakeholders. Hence YC African alumni stand a high chance of doing well in business after their Y Combinator participation. The accelerator provides a lot of value to founders and their businesses.
“We think it’s a fair deal for the value being provided by the accelerator. We believe most African startups will be comfortable giving out a seven per cent equity stake at the early stage of their business.”
DA: Any downsides? (Lack of focus, valuations too high etc?)
Ghansah: “YC can make or break your company. It can accelerate you to new heights, it basically gives you a booster shot. The ambition gets multiplied over 100x because YC pushes you to dream really big. I think that is invaluable.
“The downside to that is, 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. 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.”
On valuations: “It depends. If you raise at a high cap at demo day and go on to raise a Series A then it’s fine. But if you raise a high cap and you are not ready, and a year in your metrics don’t match that valuation and you have to do a down round, things could be an issue.”
Olaogun: “Well, valuations can be a little high. Also, I think the programme has a way of putting founders a little under intense pressure based on public expectations. Companies are placed in a kind of league once they graduate from the YC accelerator programme which naturally puts them under pressure to deliver.”
Ahmed: “Frankly, I can’t think of any. YC is very much like a protective put for any African startup. You get access to the initial capital, three months of a super-packed accelerator programme that resets the way you think about the future of your startup, and injects into you a new DNA of scale. All these help to turbocharge the startup in the early days. A good startup does not need anything less than that.”
Mbaabu: “I can’t think of any. On valuation – for investors maybe. For founders, higher valuations are mostly a good thing.”
Kimani: “The spotlight and expectations that follow can be too much to the founders.”
DA: How was it post-programme? Bit of a bump back to reality?
Kimani: “The three months at YC are intense. After the programme, you need to maintain the momentum. With so many moving parts in the business, this is not always easy.
Ghansah: “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.
“It can also be a red flag for local investors if you didn’t raise. Maybe there is something wrong with your company, so that can be an issue.”
Olaogun: “Absolutely, you’re never equipped enough for the reality of the business world, running a business is brutal and it’s a reality most founders would have to grapple with once they finish programmes like this and go back to the reality of running their businesses. Also, there can also be gaps created in the business while founders are away, these also are some of the bumps founders might have to deal with when they return back to their business.”
Mbaabu: “Anyone who went to a sports camp, band camp, or spiritual camp as a kid knows that when you go back home you will have to “bump back to reality”. A good accelerator is no different, however, if you keep the skills and discipline that you learn from the programme, you will be a better leader, founder and the company will benefit.”
Ahmed: “Not really. There is a reality check embedded into the three-month programme: defining what your North Star Metric is and tracking the metrics on a weekly basis to measure traction ahead of demo day. If anything, such a tight schedule and obsession for growth and customer focus actually prepare most startups for the hard reality of building a company.”
DA: To what extent is it good that more startups from the continent are entering the programme?
Ghansah: “The amount of attention that YC has helped bring to our ecosystem is something that you can’t downplay. In terms of helping businesses raise money and think bigger, I think YC has done really well, and I would like to see more startups go through the programme.
“I don’t know if Paystack would have built a relationship with Stripe if they hadn’t gone through YC. I think the more startups that go through YC the better.”
Ahmed: “It is good for the African startup ecosystem. It improves the odds of building truly global players from the continent of Africa with backing from other global players. It accelerates the growth of the ecosystem, and this has been demonstrated by the share size of capital flowing to Africa startups generally. The signalling effect is strong.”
Mbaabu: “I believe that Africa is producing companies that are able to play at a global scale and if this is the case, then global accelerators make sense for all parties involved. So the increase in the number of companies going to YC is in line with all the positive indicators in Africa, the youth dividend, the rising incomes and population etc. The opportunity to serve the market will just continue to produce more compelling companies.”
Kimani: “In my opinion, it’s important that more startups from Africa participate not only in YC but any other good programmes out there. The exposure is super important and will come in handy as they build their companies. Fundraising will continue to be a key benefit from YC as long we don’t have enough local early-stage investors in the continent.”
Olaogun: “We think this is really good. It has essentially helped increase the success probability of young businesses booming out of the continent.”
DA: How does it judge which African companies to accept? How is its understanding of local context?
Ahmed: “Generally, many factors are involved but we can streamline these to key items: quality of the founders, quality and scalability of the ideas, understanding of the local market by the founders, and traction. One thing that YC has done that goes against the local context is the standardisation of the term sheet for most companies. So, there is a reference point that has a global appeal: from North America to Latam, to Asia and Europe to Africa. The standard term sheet applies to every company that gets in. To a large extent, that has positively changed the local investor interest in startups and the approach to startup valuation. It is also unlocking local capital for startups generally.”
Mbaabu: “The YC application process is very straight forward. They expect that the entrepreneur defines and explains the problem, context and thesis of building a strong company. Then they determine a company’s fit and viability based on the team mostly and then traction. For the later, I noticed that almost all African YC companies had some traction prior to being accepted.
“YC has not been in the continent as long as other accelerators but they are learning fast and investing in smart teams, the 10,000 rule applies (to become an expert in a given field) and if they keep working with more African companies, they will keep broadening their local context. While they invest in even idea-stage companies from the US and Europe, I think they play it somewhat safe by investing only in African startups that have demonstrated some level of traction. Therefore, it’s very likely that their success rate in Africa becomes high.”
Ghansah: “At this point YC has invested in enough companies to have a fair understanding of how big the opportunity is and how to judge companies, based on traction, based on the team, markets that they are focused on… I still think of course they don’t have 100 per cent bandwidth in terms of how they understand local context, but they have invested in enough African companies, especially in West Africa and Nigeria.”