Apr 10, 2022
To YC or not to YC?
International accelerators are increasingly turning their attention to Africa. Chief among them is Y Combinator (YC), the world’s first and, some argue, pre-eminent early-stage startup programme. The Silicon Valley accelerator now has over 80 African companies in its portfolio, featuring continental royalty such as Flutterwave, Paystack, 54gene, and Kobo360.
This growing interest has spurred important debate about the role of programmes like YC on the continent and what this means for local investors, accelerators and most importantly — startups.
A few weeks ago, Founders Factory Africa and Verto FX brought together four successful startup founders from across Africa to unpack this trend from a pragmatic in-trench perspective.
Two of these entrepreneurs, Simon Ward (founder of FloatPays and Founders Factory Africa alum) and Ola Oyetayo (founder of Verto), are part of YC’s portfolio. They were joined by Ella Peinovich (founder of Powered by People) and Ikpeme Neto (founder of Wella Health). Ella and Ikpeme are also Founders Factory Africa’s alums. All four businesses have been successful in their own right, despite going through different programmes.
Getting it right
Leading the conversations was Founders Factory Africa Accelerator Lead Nicole Dunn. Nicole highlighted YC’s increasing investment activity in Africa and how this had crowded in both global and local follow-on investment. YC has a reputation for generating a startup ‘halo effect’ that contributes to their portfolio companies raising follow-up capital at significantly higher valuations.
Simon, whose company recently closed an oversubscribed $4 million Seed round, experienced this first-hand. “We raised on our company’s own merit, but YC was able to put us in front of the right people at the right time.”
Ola was quick to agree. “The network that YC brings is unparalleled. Their team is also world-class. They have seen so many startups go through the fundraising process, and they know what to look out for.”
Ikpeme, who has been through multiple accelerator programmes, highlighted the critical role that other functional expertise had played in his journey. “We have been fortunate to partner with organisations that have helped us build a better business through the talent and networks they have connected us to.” The panellists agreed that startups need more than just access to capital — they need access to the right skills at the right time. Accelerator programmes can play an essential role in augmenting founding teams at the early stages of growth and helping to embed best practices.
What came out strongly from the conversation was the strength of YC’s community. Simon and Ola both praised the strength and engagement of the alumni community, who share clients, give product feedback, and often act as each other’s first customers.
“This is something currently lacking in the African ecosystem. I’d love to see how we can build a more robust community of African entrepreneurs that support each other’s growth,” said Ella. “YC has also helped set industry standards, such as the SAFE note and standard terms,” she added.
The new deal
Just weeks before the event, YC announced a new standard deal. Now YC will offer startups $500,000 in two tranches instead of $125,000 for 7% equity. The second tranche of $375,000 is on an uncapped safe with Most Favoured Nation terms — guaranteeing YC the most favourable terms of the follow-on round. These terms have raised debate about whether this is favourable to founders — particularly those from emerging markets. Some took to Twitter with concerns about the implications for Africa’s local investment scene and whether they would be priced out of the most promising deals.
“To remain competitive, local investors must dial up their in-market expertise, networks, and operator experience”
The founders felt this was a good wake-up call to local investors, who have traditionally waited until later to deploy funding and often at less favourable terms. The new deal can be seen as advantageous for some, with significant upside for investors willing to get in early. Local and global investors bring different experiences and may play different roles.
“A big part of success on the continent will come from having an ecosystem of founders reinvesting in the ecosystem and ultimately being able to lift the entire sector. I think there’s a role for local investors who bring a lot of value in contextually relevant advice and make client introductions,” said Ella.
“To remain competitive, local investors must dial up their in-market expertise, networks, and operator experience,” summarised Nicole.
Whatever you think of YC, they appear to be acting as an effective signalling device to channel international capital to the continent, and this can only be a good thing for African founders.
What matters most is not the accelerator’s name but how founders leverage the platform. All the panellists agreed that the most important thing for founders is to focus on building their business. Whilst an accelerator can be an important partner to enable the journey, it should not be the end destination. Buckle up, and build.
