How Y-Combinator built a mafia in emerging markets
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How Y-Combinator built a mafia in emerging markets
Part teacher part king-maker, Y-Combinator's absolute dominance in Africa, Asia and LATAM is a fascinating phenomenon.
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YC’s genesis
Y-Combinator, more commonly known as YC, is a startup incubator/accelerator/VC born from the minds of 4 co-founders (Paul Graham, Jessica Livingstone, Trevor Blackwell, and Robert Tappan-Morris) in 2005. Located in Mountain View, at the heart of Silicon Valley, it’s safe to say YC has become the indisputable protagonist in international start-up pop culture. Founders from Los Angeles, to Lagos, to Manila, view YC as the ‘Ivy League’ startup university that guarantees their company access to the world’s most potent network of investors, founders, and mentors. Over the years, YC has reinforced its position by expanding its services and essentially becoming an all-inclusive buffet for founders at all stages of growth.
YC’s biggest impact on the international startup world is not the companies it helped take off. Instead, it is the institutionalization and consolidation of startup best practices such as talking to your users, staying lean, do things that don’t scale, etc… YC’s teachings, distilled at length in their Youtube channel and Paul Graham’s blog, have the benefit of being clear, digestible, and actionable. They have inspired an entire generation of international founders, whose start-up building playbook is almost copy-pasted from the YC curriculum. YC’s hyper-pragmatic yet ambitious approach to start-up building gave birth to a generation of young founders bypassing the traditional corporate route to found start-ups instead.
“Perhaps even more importantly, YC has changed how the act of business building is perceived. It is no longer insane for a new college graduate to try and start a company of their own; indeed, it’s fashionable. That shift owes much to YC and the curriculum it has helped popularize. Even operators that did not attend the accelerator have benefited from lessons like “do things that don’t scale.” - Y-Combinator: The Institute of Innovation by Mario Gabriele
YC in emerging markets: the numbers
YC’s first cohort in 2005 included founders of companies such as Twitch (Justin Khan), Reddit (Alexis Ohanian), and Loopt (Sam Altman). For the first couple of years, YC’s bi-annual cohorts stayed US-based, probably due to YC’s lack of reach and the embryonic state of start-up ecosystems worldwide.
In the early 2010s, YC started venturing abroad, and into emerging markets more specifically. Covid and the transition of YC’s program to remote also had the effect of encouraging a plethora of founders from around the world to apply. Here is a breakdown of YC’s history and current impact in the 4 main emerging market regions of LATAM, Asia, MENA and Africa.
In LATAM, Platzi, a Colombian edtech platform, was the first company to enter YC in 2015. Since then, YC has had a significant appetite for the Latino ecosystem, notably the Mexican and Brazilian one, which are both in YC’s top ten most represented countries. YC has even indirectly created a “self-feeding loop” in LATAM, with a plethora of Platzi students getting accepted into YC for their own startups.
In 2021, YC was by far the most active early-stage investor in LATAM, minting 61 deals despite not having any offices in the region. LATAM’s attractiveness lies in the geographical proximity to the US, but also in the significant Latino diaspora living in the States that often acts as a bridge between both regions. Among the most famous YC LATAM startups, one can mention Rappi, Frubana, Kovi, and Nowports.
In Africa, YC has also been a catalyst for the creation of some of the continent’s most renowned startups. Some of the most valuable African fintech startups to date, Flutterwave, Wave, and Paystack, have gone through YC. Fintech is YC’s weapon of choice on the continent, with 65.5% of African YC startups operating in the space.
In other sectors, YC has led to the rise of ThriveAgric (Agtech) and Reliance Health (Healthtech) to name a few. Unsurprisingly, the most represented country is Nigeria; in its W22 batch, YC accepted 18 Nigerian startups, effectively making Nigeria the third most represented country in the program behind the US and India.
YC’s importance in Africa has almost become disproportionate, to the point where some founders complain of investors waiting for a company to get into YC to invest. YC, directly or indirectly, also acts as a gatekeeper for international investment into African startups; indeed, misconceptions about the continent make international VCs warier of investing in Africa than say, in Asia for example. This leads to a situation where African YC founders are at a unique advantage amongst their peers, as they “unlock” the confidence of international funding necessary for their expansion.
In line with other emerging markets, YC’s appetite in SEA (South East Asia) has only been growing. In 2022, the incubator doubled the number of SEA startups in its batch. India represents a beast of its own. India is YC’s second biggest market after the US and has birthed renowned Indian startups such as Meesho, Groww, and RazorPay. YC also ventured into China, launching a country-specific subsidiary of YC in the country, which ended up in an unexplained debacle a year later.
YC has also, albeit more timidly, ventured into the MENA region, with more and more companies from the region joining the program. Some of the most renowned MENA companies from YC include Instabug, Baraka, and more recently, Chari.
Important to note that YC can invest in startups from around the world in part because it asks founders who get into the program to operate a “flip”. This process entails creating a Delaware (or another friendly jurisdiction) entity that effectively becomes the parent corporation of the '“local” subsidiary. This has created controversy, as local regulators complain of tax revenue loss, while YC subtly justifies it as the price to pay for non-friendly business laws. This debate has been especially heated in India.
YC’s allure for emerging market founders
Now that we’ve proven the undeniable attractiveness YC represents for some of the best founders in emerging markets, the question is why?
I’ve divided my thinking into 4 main segments: thought-leadership, no network funding, seal of approval, and infinite resources.
Thought-leadership
An underrated aspect of YC is the impact its teachings and its doctrines have had on the way founders think of how a startup should be built. YC is probably the best resource for free, extremely valuable educational content on the actual “science” behind startup building. This is best exemplified by their Startup School, a free online startup academy, which might be a quintessential case of good content marketing: build credibility in your niche to generate leads. 45% of YC’s 2022 batch had gone through Startup School before entering the program.
For founders around the world, and not just in emerging markets, YC is the foundational resource for building “startup mental frameworks”. The fact that YC is so engrained in founders’ psyche makes it top of mind for any founder thinking of taking their startup to the next level. In emerging markets, YC’s importance is multiplied by the paucity of high-quality, local incubators (the topic of foreign aid financed incubators is a story for another day).
No network funding
In an interview with YC managing director Michael Seibel, Paystack founder Shola Akinlade explains he applied to YC because he saw it as his only source of early-stage funding, citing the absence of angel investors in his home country of Nigeria. While the explosive growth of startup ecosystems around the world has recently made early-stage funding more available, YC still represents one of the only ways to access early-stage capital with no network required. Granted, the acceptance rate is 2%, but the fact that one simply needs an idea and a laptop to be considered is still powerful. YC has also cultivated and maintained a “scrappy” vibe through its famous application videos, which reinforce its ethos of “anyone can get in”.
YC’s application is also cited as a great exercise for any founder to reflect on crucial questions about their business. The fact that applying to YC itself has become a quasi-ritual for any founder insures YC gets to at least view, if not pick, practically the entirety of ambitious startups worldwide. Additionally, YC founders get access to a plethora of discounts on key services, such as hosting, which can prove to be game-changing for cash-strapped founders.
Startup seal of approval
Once again, while this point is true for any founder, its importance is multiplied for founders in emerging markets. Getting into YC represents a “seal of approval” that almost guarantees you access to, and the attention of, the world’s best investors. Founders in emerging markets struggle to convince large foreign investors to invest in markets and jurisdictions they aren’t used to. A startup from say, Zambia, adding YC to its deck automatically adds a certain legitimacy to their business and to the market they operate in.
I spoke to Ismael Belkhayat, founder of Moroccan startup Chari, and asked him why he applied to YC given the relatively late stage of his company (Chari had already undertaken a couple of acquisitions at the time). He told me that the YC stamp was a powerful driving force in getting investors’ attention but more importantly, achieving a higher valuation and thus negotiating more founder-favorable deals.
This point has been the center of criticism, as it can indeed be argued that YC, a Silicon Valley-based accelerator, acting as the “quality control” for startups and markets tens of thousands of miles away is problematic.
“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. For a US VC firm that doesn’t have a dedicated Africa team, they consider the African YC companies as the low-hanging fruits. You might consider this as “lazy”, but that’s how things have been done until now.” - Kyane Kassiri, VC @Lateral Capital and @RallyCap Ventures
Infinite network
Say what you want about YC, but the incubator's indubitable positive impact on its founders is the network, which acts like a gift that keeps on giving. Indeed, after almost two decades of existence, the YC network is without a doubt the commanding force behind the YC offering.
“There is a lot of strength in knowing that whatever problem you will encounter, there are thousands of other founders who have faced that problem, and are going to respond to you with a guide on navigating that problem,” Perseus Mlambo, founder of Union54, a YC-backed Zambian fintech startup
I think it’s also safe to say that ex-YC founders often look to maintain links with their former accelerator and are a significant lead magnet in encouraging their founder friends to apply. YC has even commoditized its internal network with Launch Bookface, a sort of Product Hunt for YC alumni.
Why YC companies in emerging markets work
Now that we’ve answered why the best founders in emerging markets flock to YC, we have yet to explain why YC-backed companies in emerging markets have achieved such high levels of success.
For this one, I divided once again divided my thinking into four categories: replicate what already works, startup best practices, edge in fundraising, and founder quality.
Replicate what already works
When one actually deep-dives into YC’s most successful emerging market companies, a lot of them aren’t revolutionary in nature. This is in no way a critique; YC has understood that one of their best shots at making it big in emerging markets is funding founders who replicate what already works abroad and adapt it to their local markets. To prove my point, here are some examples:
Rappi (Colombia): Now valued at over $5B, Rappi started as a food-delivery service in a couple cities in Colombia.
Paystack (Nigeria): Acquired by Stripe for $200M, Paystack enables merchants in Africa to accept payments. Nothing “revolutionary” in nature, but a direly needed product in the region.
Tech in Asia (Singapore): Having raised more than $17M, Tech in Asia is a media, events, and jobs platform on a mission to build and serve Asia’s tech and startup community. A kind of TechCrunch, but adapted to local realities.
Now that is not to say all YC-backed startups in emerging markets are so-called “copy-cats” (a term often used to describe these types of startups which I believe is unnecessarily derogatory). However, the success of the aforementioned startups has strongly contributed to YC’s credibility and appeal in emerging markets, as it gave the accelerator some of its biggest and earlier successes abroad.
Startup best practices
As mentioned earlier, YC is truly the Mecca for what could be considered to be the “startup textbook”. Founders who go through YC often highlight the intellectual rigor with which startup first principles are taught, and how that had been crucial for their growth going forwards.
“YC has been instrumental in pointing us to the right direction: to scale fast as a sustainable business. Most companies tend to just focus on massive growth, while we learned to focus on customer experience and fundamentals in the first few months. We talked to all of our customers and went to around 500 households to learn about their needs. Now we are blitzscaling real fast while maintaining positive unit economics.” - Ivan Darmawan, CEO of Radius, an Indonesian quick-commerce startup
Fundraising advantage
Evidently, YC companies have an almost incomparable edge when raising capital after going through the program. With capital being one, albeit not the only, way to differentiate yourself from your direct competitors, YC companies’ access to a profusion of potential investors is crucial to understanding their success in regions where access to venture capital is still lacking.
Founder quality
As with many young founders my age (20 at the time), my first (erroneous) conception of what a “typical” startup founder looked like was pulled from the “Social Network” movie, which recounts Mark Zuckerberg’s life. At the YC level, this “young genius” founder myth has been reinforced by similar profiles such as Justin Khan (Twitch) and the Collison brother (Stripe). In reality, the majority of YC founders don’t fit that profile at all.
“Despite the stereotype of Silicon Valley founders being a bunch of young college-dropout wonderkids, the overwhelming majority of YC founders today have 5–12 years of work experience, with a median of 9 years experience. A small but significant subgroup have 20 years of experience or more.” - On the YC S21’ batch, Jared Heyman
These median demographics also apply to YC-backed founders from emerging markets, which explains their success. Here are a couple of examples:
Frubana (Mexico): Led by Fabián Gómez Guttiérez, ex-Rappi, ex-McKinsey
Chari (Morocco): Led by Ismael Belkhayat, repeat founder and ex-BCG
Ajaib (Indonesia): Led by Anderson Sumarli, ex-IBM, ex-BCG, Stanford alumn
Now don’t get me wrong: this is not to say that a founder’s quality is determined by their consultant background or by the prestigiousness of their diploma. It also doesn’t mean that all YC-backed founders in emerging markets have this profile. However, I think it would be fair to say YC assures itself some base level of founder pedigree when picking founders with the “ex-consultant, Ivy League alumn” background.
Criticism
Now obviously YC’s dominance in emerging market startups isn’t without its load of criticism.
First and foremost, as seen in the previous paragraph, the YC founder makeup isn’t necessarily diverse (almost all startups I cited were founded exclusively by men for example). Critics say that YC’s dominance in emerging markets is leading to a replication of YC’s poor record on founder diversity around the world.
“In 2021, 25.3% of all U.S. VC deals went to teams with a woman cofounder; in Y Combinator’s two 2021 classes, only 15.5% of all deals went to a team with a woman cofounder. “YC invests in homogenous founders,” Díaz-Ortiz told Rest of World. “With less knowledge of Latin America than a Latin American seed fund, YC is more likely to invest in the Latin American founder who has already been to Stanford and who looks like a lot of the other homogenous founders in Silicon Valley.” - “Y Combinator’s new high stakes investment strategy is making emerging market investors nervous”, by Rest of the World.
Recently, YC introduced a new deal for its portfolio companies, whereby YC will put an additional $375K in an uncapped SAFE with a Most Favoured Nation (MFN) clause, on top of its traditional 125K for 7% deal. This means the 375K will be added to the startup’s next round of funding, and the dilution will be calculated based on the startup’s new valuation (which is considered fair to founders). This has made early-stage investors in emerging markets nervous, as they will need to get in earlier and faster if they want to get good deals. YC companies in emerging markets also tend to have a “rise all boats effect’ that shoots up valuations and disadvantages local investors competing with big American VCs.
Furthermore, some experts point out that YC’s teams don’t always understand local contexts, and that advice given to a startup in New-York often needs to be tweaked for a startup in Argentina. YC’s one-size-fit all startup doctrine is thus not necessarily the best for a portfolio evolving in such a variety of contexts.
Conclusion
In my opinion, YC has been extremely skilled at two things: picking exceptional founders, and molding them through a flexible yet clear ‘startup curriculum’ made up of a couple of tried and tested key principles. The subsequent YC network is a byproduct of time and represents what I believe to be YC’s life insurance for the next 30 years. Similar to how students use “network” as justification for the $150,000 price of a Harvard MBA, the world’s best founders will use the YC network as justification for giving up 7% of their company for a meager $125K.
With regards to emerging markets in particular, YC’s risk threshold has been extremely high, and they’ve often gone where no one wanted to invest. A case in point would be the recent acceptance of Bloom, a Sudanese fintech, into its W22 batch. As one Nigerian tech journalist told me, “YC is like the VC version of Christopher Columbus, exploring unexplored lands and opening them up to more exploration”.
Criticisms about YC’s lack of founder diversity are valid, but ecosystems shouldn’t wait for YC to change its ways. Instead, it’s time for emerging market ecosystems to create their own incubators and impose their own standards of diversity. As for early-stage investors in emerging markets complaining, I think their responsibility is to take the risk and invest before YC. More competition amongst investors = better deals for founders.
All in all, I still believe the biggest impact YC has had on the startup world has been the near-universal adoption of the incubator’s startup science doctrines. While other incubators might pop up and compete with YC, I have a hard time imagining another doctrine than the YC doctrine guiding how founders build companies for the years to come. Is that a good thing?
The Realistic Optimist provides bi-monthly, in-depth analysis of some of the hottest stories in our now globalized startup world. Subscribe below to receive it directly to your inbox and don’t hesitate to share it with people with similar interests :)