Y Combinator’s recent announcement that it would now offer startups in its vaunted accelerator program greater funds in exchange for favorable investment terms has left founders in Africa and Latin America feeling excited about the prospect of more capital — and local investors wary of Y Combinator’s increasing power in emerging markets.
Founded in 2005, Y Combinator has become more geographically diverse over the past few years as it accepts more applicants from emerging markets from across the Global South. That includes Nigerian fintech startup Flutterwave and the Colombian delivery giant Rappi.
Previously, companies accepted into the program received $125,000 for 7% equity upfront. Now, companies will receive an additional $375,000, with Y Combinator automatically included in the startup’s first round of funding out of the accelerator. That promises to make Y Combinator an even more influential fixture across the global tech ecosystem.
The announcement sparked chatter between Y Combinator alumni, including in group chats on WhatsApp and Telegram, such as the Latin America–focused YC del Sur. Founders discussed what the new format would mean for new entries. Most sounded happy for the new deal, and some even wondered if they could still get the additional $375,000.
For startups working with tight runways and unforgiving balance sheets, the calculus was simple. “It’s more money — it’s a good thing,” said Yael Israeli, the co-founder and CFO of the fintech Mozper, which joined YC in 2020 and operates in Mexico and Brazil.
But not everyone was optimistic about the impact of the new deal structure in emerging markets. “The problem [with Y Combinator] in these emerging markets is it’s taking on this role of king-making,” says Claire Díaz-Ortiz, a VC working in Latin America. She has seen firsthand the outsized impact of Y Combinator in the Global South. YC represents one of the most prominent premier funds for emerging markets — more than 10% of its summer 2021 class featured Latin American companies.
Díaz-Ortiz says the new deal structure means Y Combinator will have a bigger percentage of the capitalization table. In emerging markets, where startups tend to raise at lower amounts, Y Combinator’s share would be even higher. “You are pushing out local investors who are offering value and able to offer a lot of expertise about the region,” she said.
And by playing king-maker, Y Combinator may have an outsized impact on diversity in startup ecosystems — replicating its own shortcomings in emerging markets. 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.”
“If YC doesn’t do a better job of investing in diverse founders,” she said, “they’ll replicate many of the diversity problems of Silicon Valley all over again.”
Y Combinator argues just the opposite — and says its new model will encourage a more diverse set of applicants. “We hope the new deal encourages underrepresented founders and underserved populations to consider entrepreneurship. Entrepreneurship comes with financial risk,” Lindsay Amos, the director of communications for Y Combinator, told Rest of World over email.
Founders like Maurizio Caló Caligaris of Paraguay, whose grocery startup Calii was part of Y Combinator’s winter 2021 class, says that the accelerator opened up investor networks that he would have never been able to access otherwise, including with local VCs in Latin America. Caló sees the new deal as a clear positive for new startups: with more money, they’ll have more resources to develop their products.
“The criticism that I saw is mostly from these early stage funds or angel investors,” Caló Caligaris told Rest of World. “It’s becoming too expensive for them to join.”
The new Y Combinator deal would make life harder for regional investors, said FirstCheck partner, Eloho Omame, who is also the former managing director of Endeavor Nigeria, a local arm of the global network of high-growth startups. Now, local angels and VCs won’t have the luxury of waiting for the companies to enter Y Combinator. They will “have to work harder to identify winners early and compete to access the few coveted slots on pre–Y Combinator cap tables,” she wrote in a post a few days after the accelerator announced the new deal.
“The optionality of who [startups] bring in onto the cap table becomes really different,” says Stephen Deng, co-founder and partner at DFS Lab, an Africa-focused early stage fund.
Díaz-Ortiz is skeptical that the Latin American venture landscape is equipped to start investing heavily in pre-seed rounds to get ahead of Y Combinator. “Ecosystems just don’t do that really quickly,” she told Rest of World.