even for outsidersOf course, the inner workings of startup accelerators have become familiar: Pumped up on cordiality and energy drinks, Scrappy founders demo products on stage in front of a room full of enthusiastic journalists and investors.
Fast forward two years into a pandemic and, even with the return of hacker homes, a lot has changed about the way launch pads for startups look, feel, and show value today. Early investors are reconsidering the signal risk, dilution and, most surprisingly, the value of a traditional demo day.
Let’s start with a succinct topic: Proportions.
Signaling risk occurs when a VC chooses not to make pro-rata, or follow-up investments in an existing portfolio company. The idea is that the investors who know you best – the ones who bet on you earlier than others – are choosing not to invest in you at the next stage of your growth, which should mean That deal is not that good. Negative sentiment can upset other investors who, despite what their Twitter bios tell you, are very risk-averse people.
The accelerator has an interesting role here. If an accelerator like Y Combinator ever gets to host 1,000 startups per batch, an automated pro-rata investment in each startup will be both capital-intensive and probably inadvertently dilute its own signal. Like clockwork, in 2020, the accelerator changed its policy on automatic pro-rata investing and chose to invest on a case-by-case basis like 500 Startups.
The accelerator then wrote in a post, “We have substantially exceeded the funds raised for pro rata, and investors who support YC do not have the appetite to fund pro rata programs on the same scale.” ” “In addition, processing hundreds of follow-on rounds per year has created significant operational complications for YC that we did not expect.
“Simply put, investing in each round for each YC company requires more capital than we want to raise and manage. We encourage startups to always stay small and manage their budgets carefully. In this instance, we failed to follow his advice.”