As the most prominent startup accelerator in the world for the last two decades, Y Combinator influences how early stage tech companies receive money from investors.
After it announced a new standard deal two weeks ago—which will now offer startups $500,000 in two tranches instead of $125,000—investors in the US, and Europe have wondered what they would have to do to not be priced out of the most promising startups in their respective markets. Initial reactions reveal anxiety in those who think YC’s attempt at increasing its ownership in startups could work against those startups’ ability to raise funds from other willing investors.
But investors in Africa seem to be optimistic about the challenge of showing their knowledge and willingness to back founders long term.
“I see folks complain about the high valuation when they come in after a global accelerator and we at Microtraction can’t relate,” says Dayo Koleowo, managing partner at Microtraction, a firm that has invested in some Nigerian YC alumni including genomics research company 54gene, and Lemonade Finance, a remittance company for Africa’s diaspora.
Microtraction’s model is to invest a minimum of $25,000 very early before startups join accelerators like YC, and it has done 19 of such deals, Koleowo says. His antidote to YC anxiety is for investors to “find [startups] early, back and support them, do follow-ons if you can and stop complaining.”
Since it invested in Paystack in 2016, YC has admitted over 70 African startups into its famed three-month program, with Nigeria dominating the sub-Saharan African contingent. 4 out of 7 startups listed in the present winter batch are Nigerian.
The novelty of being admitted to YC is probably fading, especially since the program has been fully remote for two years due to covid-19, but African startups remain excited about being selected. Founders see it as validation that they are, according to YC’s motto, “making something people want” and stand a good chance of success.
But the problem with this thinking is that some US investors interested in Africa would wait for the YC signal before parting with their money. Kyane Kassiri, a Tunisian venture capitalist, touched a nerve last year with a conversation about “YC puppies.” Without dedicated Africa teams that understand the early stage startup landscape, such investors only go where YC goes.
The terms of YC’s new deal could ruffle this strategy a bit.
Because the extra $375,000 will be given to startups at the best valuation available after YC’s initial $125,000 investment, “founders will be clearer about what they are looking to get out of YC, considering the sacrifice they have to make. If they are not very careful, it might lead to a lot of dilution for them,” says Adenike Sheriff, a principal member of the investment team at Lagos-based firm Future Africa.
On the other hand, Sheriff says African investors too have reason to be wary of the YC hype.
“Being able to raise solely on the basis of being a YC company and drive FOMO will die down because the prices may be too high for the local investors. They are most likely better off shifting their focus to finding companies they are excited to invest in very early whether or not they get into YC.”
YC may be “Africa’s default early stage seed fund” as Iyin Aboyeji, the former Andela and Flutterwave co-founder and Future Africa founder, says, but the Silicon Valley company’s latest change is an opportunity for African investors to be more imaginative and valuable.
HoaQ club, co-founded in 2020 by Paystack employee Kayode Nubi, has helped a community of about 300 individuals invest in African startups, sometimes alongside YC. Until now, it has focused on post-revenue startups but now plans to launch a $5 million fund that will fund pre-revenue, pre-product companies. The fund will invest early before YC, but also follow-up in subsequent rounds, Nubi says.
His note of caution is that pre-seed investors shouldn’t optimize their hunt for ideas that would probably be admitted to YC. “We should hunt for good companies and if they get to YC, that would be icing on the cake.”
Before now, an African investor that wants a discount before investing in a post-YC startup could tout their ability to help the startup get a license or speak to a regulator. That may not fly anymore, says Uwem Uwemakpan, vice president of fund operations at Ingressive Capital, a seed stage firm. “It now behooves us to identify innovative founders, invest early, and influence their growth as much as possible.”
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