Seed fund Y Combinator is not a necessity for startups

The very buzzworthy start-up pitch day, Demo Day by Y Combinator, happened last week and it proved why it’s a big deal.

Now, Y Combinator, or YC in short, is an American accelerator that has been providing seed money for startups since 2005.

A total of 319 YC-backed companies from 41 countries pitched to more than 2,400 selected investors. Ten African startups pitched - Nigeria (five), Egypt (three) and one each from the Ivory Coast and Kenya - with most being in fintech.

Kenya’s only selectee, Kidato, is an edtech startup led by Sam Gichuru. It’s the accelerator’s third online demo day, its second all-virtual class and remote pitch session following its decision to go fully remote from the previous batch in 2020. But for all its hype and success, is YC necessary? The short answer is No. The long answer is No, but maybe recommendable.

Here’s why. According to the YC database, since its inception to date (and 30 startup batches) it has invested in more than 3,000 companies. Out of these, there are more than 400 who are officially inactive meaning it’s had a 20 percent failure rate.

However, as some analysts have discovered, the majority of YC investments have happened in the last few years (over 1,500 since 2015). This means most companies in their portfolio are too young to have shut down already.

If one takes companies only from their first 17 YC batches, the rate of inactive companies doubles to about 40 percent. These numbers don’t include all the active firms, which are struggling (and unlikely) to achieve any meaningful success, and more importantly: investments exited at a loss. In short, the failure rate is possibly over 50 percent.

Not to be misunderstood, the point is not to bash YC. How can I? Their value add is enormous - networking, advice, validation and seed funding (Sh12.5 million in return for seven percent ownership).

And who can stand up against YC’s record - 18 unicorns (businesses worth over Sh100 billion) and 110 companies worth over Sh10 billion.

I mean, when you have names such as Stripe, Airbnb, DoorDash, Coinbase, Dropbox and Reddit among others in your portfolio when they were starting out, you must be something special.

Besides, it's the startup's responsibility to make it happen, not YC’s. But that said, it’s important to note that a significant number of startups fail even if they benefit from the best possible conditions in the world.

So, why wait for an incubator’s acceptance to have permission to succeed? One only stands a five percent chance of getting in anyway.

The truth is that businesses grew and were successful long before YC came about, and many businesses will continue to grow and be successful long after YC.

Further, not many people can just up and move to San Francisco or leave their responsibilities at home while they take part in an intensive several-week boot camp and work on nothing but their business.

Even if you get to join, you’re a risk to be diversified away. YC, just like a farmer, sows its seeds in startup A, then moves to B, then C and all the way to Z, for it does not know which will succeed, whether this or that, or whether all will do equally well.

If that’s the model, there’s no difference sourcing from your neighbourhood VC and keep it moving.

Mr Mwanyasi is the managing director at Canaan Capital