What Challenges Are Y Combinator-backed African Entrepreneurs Tackling?

It’s probably reasonable to say that technology and exposure have altered the way Nigerian entrepreneurs work. Following its debut with Senegal’s Wave, Y Combinator, one of the world’s most prominent accelerators, has grown in importance in Africa.

According to research, by our analytics and research team, African businesses join YC within a year or two after their inception.

Four famous experts decided to launch a firm in March 2005 that would revolutionize the way venture capitalists (VCs) invest in startups. With seed money of $150,000, the organization landed Reddit in its first round and has since gone on to finance an impressive array of companies, including Stripe, Airbnb, and OpenSea.

Y Combinator has seen to strengthen its attention on Africa every year since Paystack’s admission in 2016. This has had a big impact on how African businesses function, as well as helping some entrepreneurs enhance their business operations.
Nigerian businesses have dominated the landscape since Paystack’s inception in 2016, migrating towards the accelerator. It’s no surprise that Nigerian companies account for 51% (51) of YC-backed African businesses (95). Egypt is in second place with 12 businesses, while Kenya rounds out the top three nations with 9 startups. Nigeria’s seeming domination in YC has a variety of explanations, but it’s not unexpected given the accelerator.

When one startup from a region goes through YC, gets noticed in the news, and raises money after demo day, additional entrepreneurs from that area start applying the next year, according to Kat Manalac, Head of Outreach at Y Combinator.

“We witnessed this in 2014 with Algolia, whose creators were among the first French to join YC.” They completed YC in the winter of 2014, and the next batch had 17 French entrepreneurs. “After Paystack went through the batch, this began occurring with African firms,” she explains.

As of March 2021, Africa’s YC-backed businesses have raised $1.3 billion, with two of them — Wave and Flutterwave — having reached a billion-dollar value. Another significant success story, Paystack, was bought by Stripe, a payments firm located in the United States, for $200 million in 2020.

These tales seem to demonstrate investor interest in YC-backed businesses. For most investors, entry into YC indicates a startup’s value has increased. However, the key issue remains: what problems are Y Combinator-backed businesses addressing?

What challenges are YC-backed businesses in Africa addressing?

Despite the fact that this is the most apparent question, I believe we should have phrased it as follows: What challenges are YC-backed businesses in Africa attempting to solve? Why? “Problem nor dey finish,” to use Nigerian slang, simply indicates that difficulties never end.

These firms operate in a variety of areas, including financial services, eCommerce, agriculture, healthcare, and mobility and logistics, according to our data.

Education, the media, and telecommunications

Because each area includes just one YC-backed company attempting to tackle its challenges, Education, Media, and Telecoms are grouped together. This is hardly unexpected, given that the Education sector received just 5% ($245 million) of the $4.9 billion funded by African entrepreneurs in 2021.

While Africa’s education startups did not get up to 3% of startup investment ($1.07 billion) in 2020, Media and Telecoms had no significant impact on the funding levels for 2021 and 2020.

These firms have raised a total of $7.2 million and seem to be making progress in their respective fields.

According to the African Union, there were 42 million out-of-school children in Africa in 2021, with West Africa accounting for 40% of the total. Six out of ten Africans still lack Internet connection, and pricing remains a major concern for those who do.

It’s worth noting that these are very capital-intensive industries that may not appeal to the fast-paced, high-growth characteristics of current startups. However, we may just be a creative implementation away from solving the issue. We realize it’s easier said than done. What about the media? That’s a whole other game. Other industries represented in this category are Real Estate and Marketing.

Energy

So far, two Energy businesses have completed the coveted accelerator program, raising a total of $22 million. Renewable energy solutions have drawn excellent finance in Africa, which is somewhat better than the three sectors mentioned above.

While it only received 5% of financing ($245 million) in 2021, it received 22% the year before. A simple look at the figures, which indicate that 43 percent of Africans lacked access to power as of 2019, clearly reveals a largely untapped market.

This, like Telecoms, is capital demanding, and numerous renewable energy alternatives are scarcely affordable for the typical (or even upper-middle-class) African, according to our observations.

Agriculture

Food is an important aspect of society, with all of its many classes and delicious nutrients. So far, YC has invested $64 million in three firms that are working to develop tech-enabled solutions for food security in Africa.

Like the preceding sectors, it seems that there is a lack of investor interest in firms that are developing agricultural solutions throughout Africa. Agriculture businesses received 4% of venture capital financing in 2021, down from 7% in 2020.

According to World Vision, 282 million people in Africa are malnourished, and this is only one of the numerous underlying issues. While food costs continue to rise, 37% of the food produced is wasted.

Logistics & Mobility

Commerce and practically everything we do revolves around mobility and logistics. Six African Mobility & Logistics firms have raised $94.6 million via YC thus far. The majority of these companies are headquartered in North Africa, with Nigeria accounting for around 30% of them.

Recent investment announcements in North Africa have rekindled interest in eCommerce. In all, mobility and logistics firms received 10% of total capital in 2021, up from 7% in 2020.

When both industries are separated, the majority of these businesses are logistics firms. Mobility companies, on the other hand, have garnered far less money.

Healthcare

The health industry in Africa is massive, not because of the number of hospitals and medical equipment, but because of the number of issues that need to be treated. In Africa, everything from preventative healthcare to telemedicine, health insurance, and precision medicine is a priority.

Eight African health firms have received $115 million in funding from Y Combinator. Preventive healthcare, health insurance, cancer diagnostics, medical logistics, and precision medicine are among the services provided by these firms.

Nine of Africa’s top 10 causes of death are health-related issues with a long history. While healthcare entrepreneurs are on the rise, their services are mostly targeted at a certain demographic, making it difficult to see how they might reach the general public without major legislative support.

Health companies received 8% of financing in 2021, unchanged from the previous year’s 9%. While technology is fantastic, there are certain severe issues that are beyond its grasp – at least for the time being.

Marketplace businesses have been more popular in recent years, and platforms that just provide the technology to link vendors and buyers are springing up with a variety of execution tactics. YC has so far invested in 17 businesses aimed at assisting Africans in buying and selling online.

Given Jumia and Konga’s well-documented troubles, there are many worries about the sustainability of eCommerce businesses in Africa. Despite these concerns, YC-backed African eCommerce businesses have raised $138 million to far.

In 2021 and 2020, eCommerce companies received 3% and 5% of total capital, respectively. It’s also worth noting that a growing number of eCommerce firms are now focusing on servicing businesses rather than consumers.

Monetary Services

By nearly every criterion, financial services startups are the crème of the crop and the most popular industry. For the previous four years, it has received the most financing and, possibly, the most media attention.

YC has invested in 47 Financial Services firms in Africa, accounting for over half of its graduates. They’ve raised approximately $854 million in total, accounting for around 65 percent of the total capital raised by Africa’s YC graduates.

This tendency, however, is not exclusive to YC. Due to megadeals from Flutterwave and Chipper Cash, fintech businesses accounted for 62 percent of financing in 2021. Fintechs received 33% of capital the previous year, still much more than any other industry.

There are many clear reasons for fintech businesses’ popularity. More than half of Africa’s population lacks access to formal financial services. Africans had a median age of 19.7 in 2020, which meant that half of the population was younger and half were older.

Most fintech businesses’ efforts seem to be focused on enhancing the experience of consumers who already have bank accounts, rather than promoting financial inclusion. However, the verdict on their effectiveness is yet out.

Payments, for example, have seen the biggest development. API-led fintechs like Paystack and Flutterwave are transforming the way financial institutions interact, but practically every other sub-sector is still in its infancy.

What is the significance of fintech?

In answer to our inquiry about fintech’s seeming dominance, YC’s Manalac replies, “What we finance is often a mirror of what excellent teams are applying with.”

According to Manalac, the firm does not specifically seek out fintech startups, although it does get multiple applications from entrepreneurs delivering financial services solutions.

“It’s no surprise that payments are leading the way because it’s a primary pain point for all human beings, regardless of where they are, and it’s one area where technology has proven that it can build solutions for,” says Adesoji Solanke, Renaissance Capital’s Director of Frontier/SSA Banks & Fintech Equity Research.

Pelumi Aboluwarin, CTO of Nigeria’s Nomba (previously Kudi), believes that operating a company is challenging enough without having to worry about payments. Payment, according to Perseus Mlambo, CEO of Zambia’s Union54, is the key to enabling breakthroughs in health, agriculture, and industry.

Ikenna Nzewi, CEO of Releaf, a Nigerian Agritech firm, concurs, despite the fact that both founders operate major financial services businesses.

“Because fintech was the initial component of our evolving innovation narrative, it’s only natural that it has received the majority of investment and attention so far. However, I think that as more industries innovate, we will see a more diversified divide.”

All things considered, YC-backed businesses are mostly seeking to tackle challenges in banking, eCommerce, logistics, and healthcare. We should be able to better grasp how these digital solutions may be utilized in an African setting as these businesses get more expertise. Going through YC is just the beginning, according to the entrepreneurs we talked with.

Do you want to know how YC’s actions are affecting Africa’s startup scene? To get perspective, we talked with several well-known entrepreneurs who had gone through the accelerator. Monday, keep an eye on this place.