The accelerator bubble can solve itself quite easily: Do away with overhyped demo days for too-young companies. Anyone can put together a flashy pitchdeck in three months. Instead, why not have the programs prove the value they’ve created over time? I propose replacing demo days with “reunions,” which showcases a company’s growth and staying power after one, or even three, years. By then the young startups will actually be ready for serious capital, and investors will be more serious about ponying it up.
Hear me out.
Relatively speaking, startup accelerators are fairly new: The category’s pioneer, Y Combinator, got its start in 2005, but didn’t gain notoriety until recent years, with its big success stories, Reddit, Airbnb, and Dropbox. The billion-dollar valuations of the latter two have spawned legions of imitators. Most accelerator programs are younger than three years old.
The standard program is three months long, where the accelerator takes 5 to 8 percent equity in the startup in exchange for a small amount of money ($10,000 to $50,000). At the end of three months, the startups pitch their company to investors and press at a demo day in hopes of raising a more serious chunk of cash, ranging from a $500,000 seed round to $5 million Series As in some cases.
Like anything new, the model takes time to perfect, and it’s evolved significantly in the last year. Already we’ve seen a variety of twists on the equity investment part. Some programs, like TimeSpace and Work–Bench, now take no equity and invest no capital, offering simply a sharing of expertise and industry contacts in exchange for a little new-fashioned innovative spirit. Others, like Greenstart and Ensemble, now offer design services in exchange for equity. Others still, like the one run by real estate organization NAR, actually charge their companies to participate.
I’ve been critical of accelerators, arguing that there’s an accelerator bubble and that any good startup probably doesn’t need one (unless it’s Y Combinator). I’ve argued that corporate accelerators, especially those that charge money to their startups, are dangerous to get involved in. I’ve discussed investor fatigue and the problem with over-hyping startups at such an early stage.
But this week I realized most of my criticism goes back to one key thing: the demo day. After numerous conversations with investors, I’ve concluded they are ineffective and possibly even damaging, for two reasons: hype and bad incentives.
First, the hype. As described by Francisco Dao last year, it only takes a small fundraise and some press coverage to catapult a company into the hype cycle, making hype fairly easy for what he calls “the least ambitious startups.”
Case in point, there are not one, but two incubator-launched companies selling subscriptions to men’s underwear in a box, and both of them have been written up in TechCrunch.
Since VCs and the various other players of the hype machine don’t want to be embarrassed, once founders/companies are in the loop, it then becomes in everyone’s best interest to keep the cycle moving, oftentimes to an acquisition or long enough for the incubator to cash out to a later stage investor.
Hype is in many ways an inevitable part of consumer tech; it’s the nature of the beast. As tech bloggers, it’s our job to cut through it, while also competing with other blogs to be first to news. For example, I wrote about a number of this year’s TechStars companies before demo day, partly because I was interested in their products and founders (some of which I’d been following for awhile), and partly because I’m competitive — I want to be the first person to write about new products. Like Bryan Goldberg explained earlier this week, media is a balancing act; in this case, it’s a balance between judgment and breaking news. (On the flip side, I was okay to let someone else break the men’s underwear startup news.)
Either way, hype is a risk. Fred Wilson, a partner at Union Square Ventures, warned against hype in his PandoMonthly interview earlier this summer. “It’s a drug,” he said. “But it’ll bite you in the ass every time. If you choose to build your company on hype, you gotta live with the consequences.”
The hype problem is particularly acute when you’re only three months out of your idea-on-a-napkin phase. At that point, how can you possibly live up to the expectations, and the high valuation that comes along with it?
Accelerator companies are by nature very young. Which is perfectly fine — that’s when they can benefit the most from mentors, their peers, a structured program, some discounted services, and a tiny bit of cash. But no matter how young they are, they still have to present on demo day. They may not even have a functioning product, but they get on stage anyhow and present a flashy, polished PowerPoint that’s much more sales pitch than actual demo. Often companies pivot while in the program, meaning their idea is less than three months old. My favorite example is the TechStars boulder company 27Perry, which pivoted three weeks before demo day and still presented a pitch. I’m not terribly surprised that the company is now out of business. Building a legit, investment-ready company overnight is not possible, and VCs can spot the bullshit from a mile away.
So why hype up something that is barely even a thing?
The reason is obvious: to raise funding. Which is the second reasons demo days are the worst. They’re all about the funding.
You’re probably thinking, “Duh, Erin, that’s kinda the point.” But if so, then why is it that almost every one of the many investors I reached out to said the same thing: I don’t invest in companies from accelerators.
Those that have backed companies from accelerators in the past said they had underperformed relative to their valuations, and that they weren’t eager to do it again (Some noted Y Combinator as an exception.) Others said they’re ambivalent about whether a startup was or wasn’t in an accelerator, but they never invest around demo day because of the hype, and because the companies were too early stage at that point.
“It feels gimmicky,” one said. “There are songs. It feels like a broadway show, like a production rather than something that has substance.”
“As a forcing function to get investors together to create artificial scarcity, demo days only really work for the best companies,” another investor added. Not to mention, that artificial scarcity also tends to make companies magnets for party rounds, which many investors prefer to avoid.
“Many of the startups study to the test, i.e. demo day, rather then work on a sustainable business plan,” another added. “It’s transparent, particularly when they give the same style pitch to VCs months later, which just doesn’t work, at least for us.”
Despite the frustrations with demo days, every one of the investors I talked to is involved an accelerator program as a mentor. Why? To meet teams that might eventually make a cool, investment-worthy company. “We are more likely to invest later, well after demo day, when the hype has calmed down, the team has made real progress, and only if the opportunity is a big one,” one said. Launchpad, the top accelerator in LA, has taken this to heart. The program, which offers its companies a rich $100,000 investment each, includes heavy investor involvement through mentoring, but skips the demo day.
The involvement of investors as mentors tells me that the accelerators themselves are not the problem. They act as a filter for smart, interesting founders, surfacing them to the community. But demo day is too early for investment or for press hype. That’s why so many investors I spoke with were receptive to the idea of a reunion demo day.
Not only would companies be able to show traction, and even a working product, but we’d get to see which companies survived and thrived in the first year, which is a testament to the strength of the accelerator program. Rather than boasting about how many of their alums went on to raise money or sell, we could see for ourselves what they’ve actually built.
[Illustration by Hallie Bateman for PandoDaily]