Finding Access Through an Accelerator

March 31st, 2015 / Comments Off on Finding Access Through an Accelerator

I recently spoke with Zain Jaffer, the amazing CEO of Vungle, which is one of the companies in our portfolio. Just four years ago, Zain was working in London in an office the size of a closet and had no money and no Silicon Valley connections. He heard about AngelPad, a San Francisco-based incubator, and although he didn’t have the pedigree that would help with his application (such as a degree from Stanford and Valley connections) he and his co-founder figured out a creative way to pitch the incubator. Through a video and targeted ad buy, they squeaked their way into the last available spot in 2011. They were living in hostels, possibly even a homeless shelter. AngelPad helped change the direction of the company, which pivoted from doing mobile apps to a new video advertising platform that helped make traditional text and banner ads a thing of the past. It also changed the founders’ lives.

We’ve met many of the startups we’ve invested in — including Hipmunk, Meteor and Panorama Education — through accelerators. About 20% of our portfolio companies have gone through these programs. We all know incubators have churned out huge hits, as evidenced by Instacart, Airbnb and Dropbox. Yet, many startups never consider joining an accelerator program. So, what’s the right path?

There are great positives to participating in these programs:

Incubators offer access to investors and seasoned execs. They also provide an important community. As various accelerators have matured, they have produced vibrant and increasingly accomplished alumni networks, which are filled with other founders who can offer advice from what they went through two years ago. Many of our founders have highlighted Y Combinator’s email list as one of the most indispensable benefits of the program, even years down the line.

Different incubators offer different models, which is a good thing. For example, Y Combinator has entrepreneurs who get together on a more intermittent basis for class events and mentorship. AngelPad has all entrepreneurs working in the same location.You’ll be in the company of some of the brightest, most driven entrepreneurs around, who will hopefully challenge you to be even better. Because these accelerators take ideas that are at an even earlier stage than where a venture-capital firm typically can invest, great ones will challenge a founder’s assumptions and offer routes to faster growth.

Increasingly, accelerators provide enough initial capital to hire a small team, spend some on marketing and relocate the team to the Bay Area or other desired locations.

While accelerators don’t take controlling stakes in companies, founders can give up quite a bit of equity (2-8% of a company) for the right to participate. It’s fair to ask if that meaningful dilution is worth the benefit to your business. It may not be worth joining, for example, if you have a product already working and scaling fast. Companies like Pinterest, Facebook and Square never incubated. In enterprise businesses, many of our founders have worked on very similar projects in previous companies, and don’t have the need for additional validation — they know the technology they need to build, they have a rolodex of customers and simply need capital to get going. Currently, the seed market is extremely competitive, meaning these entrepreneurs can get attractive valuations from value-added investors relatively easily.

For better or worse, you will be evaluated against the other companies in your class, and we sometimes see founders conflate “winning” a demo day with building a long-term business and “losing” a demo day with failure. There are plenty of cases of companies raising more than they needed and then struggling to deliver, and just as many cases of great companies that couldn’t get any investors to bite when they went through an accelerator program, yet have impressively executed in the time since. Remember that an accelerator is merely the first inning of what will hopefully be a very long game, and optimize for surrounding yourself with the best possible teammates.

Getting into any of these incubator programs is very selective, but admission into an incubator does not assure greatness. There is no guaranteed success. Getting into Harvard is never the end game; you still have to perform and deliver something valuable. There’s no such thing as a free lunch — especially in Silicon Valley.

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