Deciding whether to attend YCombinator (YC) or not is a complex decision for any founding team that is lucky enough to receive an offer. As MENA founders, we went through the YC process and were accepted last year, but ultimately decided to turn it down after weighing the pros and cons. Here’s what we learned:
1) Serial entrepreneurs vs first-time founders
Ycombinator has great content and mentorship on many aspects of company building but it is more geared towards first-time entrepreneurs. A lot of their structure and weekly workshops contain topics that are more relevant for you if you have not built businesses before. For founders that have some experience building business already, it may not be as much value added.
However, if you are a first-time founder and need help with some of the fundamentals of a startup and some technical aspects such as structuring a B2B sales team, or how to scale inbound marketing or fundraising – then you might learn a lot from Y combinator’s mentors.
2) Signalling
In fundraising, signalling is important, as is the careful construction of your cap table. Ultimately, you want to bring on as many value-add investors as possible and make space for people and VC firms who can help you with your business. With the increased cohort size, the YC signal is weaker now and some VCs even consider attending YC a negative signal. The reason is threefold:
-YC teaches you how to create hype around your company and create FOMO (smart investors do not want to overpay for ‘hype’ and a lot of the less sophisticated FOMO investors have already been burnt recently);
-A lot of experienced founders are not even considering YC so there is some negative selection bias there;
-The network value gets diluted as there are so many YC startups that have gone through the incubator.
3) MENA network and advice are key
Ycombinator has an absolute world-class community globally and in the USA. Their roster includes companies like Airbnb and even some great companies in our space such as Brex and they have strong ties with Silicon Valley funds and American investors.
However, their network within MENA is weak as they are just venturing into this region. Building a startup in MENA is very different to building in the USA – the work culture, fundraising/hiring, legal & compliance are very unique to this region – YC’s advice may not be very pertinent and may even mislead founders.
As an example, the American aggressive directness with fundraising may not be very helpful when entering negotiations with local Dubai investors. Do not expect Ycombinator to help you with B2B sales in Dubai or Riyadh, or to make local investor introductions.
4) Cohort size and stage
As we all know, YC had increased the cohort size and then recently decreased it to about ~250. That is still a lot of startups (~500 per year). While you still get some one-on-one time with your mentors, the overall impression that we got from the YC interview process was that it felt more like a factory churning out companies.
Careful consideration of the stage and timing is also important. By the time we were accepted, we had already raised pre-seed $2.5mm at a good valuation and launched our product. Had we been accepted before we raised our pre-seed, the consideration would have been different and the YC support would have been more valuable.
5) Dilution and market conditions
Going to YC is extremely dilutive ($125,000 for 7 percent + $375,000 MFN). The idea is that you make up for it with a higher valuation if you attend YC. This is no longer feasible in the current downturn as there is a lot less FOMO around YC companies now.
Consider this example if we wanted to raise a $4mm seed round:
We can raise $4 million seed on $20 million post-money. This will equal a dilution of 20 percent.
If we accept YC’s $500,000 total investment, we would have to raise an additional $3.5 million at $30 million post-money to match the dilution of 20 percent.
The difference between $20 million and $30 million post-money might not sound like a lot, but many sophisticated top-tier investors are valuation sensitive (rightfully so). Ultimately, you want to ensure that the valuation/dilution targets did not impede your ability to bring good investors onto your cap table.
Deciding whether to attend YC or not depends on your stage, region, timing, network, and circumstance. In our case, the costs outweigh the benefits. Building a successful company requires building a village of experts to help you and your founding team – and you should carefully consider whether YC is the right fit for your cap table. There are no shortcuts to success.
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