Archive for April, 2011

The Downside of “Demo Day”

Posted on April 18, 2011. Filed under: startups, venture capital |

Preface: I believe in accelerator programs, am an active mentor in more than one, and think they play a vital role in our ecosystem.  If they are here to stay, which I hope they are, I think they need to evolve.  There is room for improvement.

Lately I’ve been a little conflicted about accelerator programs.  On one hand, I love the support network and education that they are providing to young entrepreneurs.  Giving founders a platform to build on top of, a sense of community, and direction through the early days of product development is an incredible gift to our community.  Where I’m getting a little caught up, is exactly there.  Accelerators are so pro-entrepreneur, that we have almost positioned them as philanthropic entities when, in fact, they are definitely for-profit.  As for-profit entities, we should be aware of how economics influence their curriculum and guidance.

When you join an accelerator, while you’re interests are definitely deeply aligned around value creation, there are some points where their economic interests are actually at odds with those of their founders.  Here are some dynamics to be mindful of:

1)   The accelerator is economically incented to get every single company in their class funded.

This may seem like a no-brainer, but there is actually an opportunity cost to your time.  Starting a company is about having a thesis, building, testing, collecting data, and make decisions about the viability of the opportunity at hand.  In many cases, founders enter into an accelerator in the most nascent stages of development.  Having seen the results of these programs, I would estimate that 25-50% of the average accelerator class, does not, in fact, have a viable business worth pursuing.  For this segment of a class, it is in the best interest of a founder to stop working on the project that they entered into the accelerator with and start looking at other career opportunities, whether they be starting a different company with different people, joining a company that you admire, or just realizing that the startup life isn’t for you.  What I’ve seen from these programs is that every single company attempts to capitalize on or around demo day, and I think this is a problem.  There is so much momentum around completing this rite of passage within the accelerator architecture that kids don’t realize with the acceptance of outside capital they are making a 3-5 year life commitment.  If I were running an accelerator I would be brutally honest and advise the bottom 25-50% of my class not to move forward with financing post-demo day (I actually think this could still work within the math of an accelerator if you could effectively redistribute the talent into the top 50% of the class, but that’s hard to put into a model).

2)   The accelerator is creating a market for the bottom half of their class by exposing them to weak investors.

There’s a reason that accelerators invite 300-500 investors to every demo day.  It’s because that’s how many investors are required to make a market for deals that shouldn’t get funded.  Accelerators mix professional investors in with valueless me too investors and almost confuse those me too investors into thinking the accelerator’s assets (each startup in an accelerator is an asset given the equity position that the accelerator holds) are attractive by seating Joe Shmoe next to Mike Moritz and suggesting that Joe Shmoe is now in the flow of tier 1 deals.  The market created in the demo day accelerator environment is not reflective of the overall market, and this availability of capital mutes important negative input from the capital markets, therefore unnaturally deluding the bottom 50% founders into believing their company is worth that 3-5 year commitment .

3)   Demo days create an environment for both entrepreneurs and investors that encourages unthoughtful partnership.

Big VC’s and dilettante angels alike approach demo days as though they are going to the supermarket.  They listen to thirty 2-10 minute presentations and then are encouraged to “pick one or two” from the batch. The session breaks, founders and investors are thrown into a room together, and investors walk around committing $100K checks to their “favorites.”  What a terrible way to enter into a 5 year partnership.  As a rule, I will not invest in a single accelerator company without at least spending an hour or two talking through their business and getting to know them before or after a demo day.  There is a manufactured urgency that comes with the demo day environment where I believe careless partnerships are being formed.

So yea, I’d like to see accelerators evolve from what I view to be a 1.0 model, and maybe the first place I’d start is with the destruction of “demo day mentality.”