I am pretty long in the tooth for a tech entrepreneur. I graduated college and started my career the year IBM’s PC was released. Since then I founded and exited three tech startups; each one bootstrapped and sold to a public companies. Startups are unique. They are about building value via disruption. You have to befriend the status quo, then kill it. If I make it sound like a violent process, that’s because it is, and never more so than when you are trying to raise funding. After a recent foray into today’s funding options for entrepreneurs — Vitro has won 1 pitch competition, placed runner-up in 2, and we’ve engaged in conversations with a few high-profile accelerators — I’m convinced the status quo begging for disruption is tech funding itself.
Don’t get me wrong, raising money has never been pretty. Generally, I like to compare it to a knife fight in a dark room. But the current incarnation of tech accelerators seem particularly insidious. Marketed as a tool to “help people quit their jobs”, the model actually seems to be more like throwing lit matches into a room, in the hope that one lands perfectly and lights a candle. If the matches miss and end up burning the house down, so be it. In other words, accelerators attach themselves to as many entrepreneurs as possible, take a material percentage of shares, and ensure their priority placement in subsequent rounds of funding, basically forever. What are they offering entrepreneurs in return? In my experience, it’s not much. And a model that takes from its customers without giving back — a model with no value proposition — is ripe for disruption.
Let’s look closer by examining three aspects of accelerators: Method, Strategy, and Culture.
The core value of accelerator philosophy is you make money, we make money. I have heard this mantra consistently. It has a nice ring to it. Sure, if you help me grow our company, we will be happy to share. But it belies a core principle in investment: capital is an end unto itself. There is no promise of playing fair or being on the same team. And of course, accelerators will largely work to protect their interests.
Some specific examples I’ve seen: they impose Founder’s Agreements, requiring founders to vest their shares. They grant themselves congratulatory discounts in your next capital raise. They give themselves 2X liquidity preferences and wrap it all in an agreement that “everybody uses.” They encourage you to “use our legal to save money.” (Note: NEVER share legal with an investor. It is a conflict of interest. I will write another cautionary tale about this practice another day). Finally, any contractual obligations for the accelerator to build value into their investment are typically absent. The entire enterprise is focused on a Demo Day or some such swing-for-the-fences event. One in hundreds or even thousands has the serendipity of matching the zeitgeist of the moment. But this is not a strategy for helping startups build a valuable product or a healthy, productive business. So you make money, we make money begs the question: exactly what are you doing for your share, anyway?
Prior generations of venture capital came with the strategy of syndication. The core idea here was to build the team, establish management systems, fill the pipeline and lead other investors to follow. There are still VC firms that coronate winners. But most of them were built on either pure luck (we got Netscape for free?) or dumping trash to suckers for billions (et tu, Yahoo?). Today’s household billionaire VC names were built in this way. Not pretty, but there was actually a path to liquidity that operated through the 90s (read IPO) that was permanently destroyed through the Bubble in 2000. Incidentally the IPO market was destroyed in spectacular fashion through the shameless sales of concepts so obscure or byzantine that eventually it became clear that they were total bullshit (re-re-intermediation??).
With accelerators, the strategy is laddering: pitch a low value offering of, say, $75,000, and then build larger rounds if there is interest toward $1 million or more. This is a low-touch, no-commitment fundraising strategy. The goal upon engagement is simply more funding. Little to no interest is paid to profitability, management, or foundational technology. In fact, these are distractions. Get money now, figure out the technical and management foundations later. All the great companies lose money all the way, right? This is a foundational strategy built on a culture of bankruptcy.
Fail fast. Free beer.
When I learned to drive, the idea was to not have accidents. To learn quickly, you need care and luck. Even then, accidents happen. My first company won several Inc. 500 listings, which were a big deal in the 90s. I went to one event where there was a lecture about growing a business poor. Stupidest idea I had ever heard of! I went home and had a laugh with my team. Then we got a huge order from Walmart. 6000+ stores, hundreds of units of software in each store. We tapped our line of credit at the bank for a couple of million dollars (we were self-funded), shipped the order and watched it sell through on Walmart EDI. The invoice came due, and we got 6000 requests for proof-of-delivery. That was easily a month’s work. Pure stall-ball. We had grown ourselves poor … and barely escaped by pure serendipity.
As a startup, you will eventually run out of money. No matter the structure, investment overtakes income sooner or later. It’s how you work out of the bind that makes or breaks you. This idea of failing fast favors the incubator, not the startup. With a few hundred investments each year, it is far easier to write-off a struggling company and focus on hawking winners to the next round. With this kind of attitude, what sort of support can entrepreneurs expect when they inevitably encounter hard times in the growth of their business?
If we take this a step further, we look past the money and consider the team. In building a team, you ask for the full faith and confidence of human beings to dedicate themselves to your ideas. Failing fast implies that you aren’t going to hurt too many of them. But isn’t the point that failing them at all is morally damaging, both for you and for them? Convincing good, quality people to join a shoestring company takes commitments of trust, friendship and loyalty. In return, the duty of the leadership includes the burden of responsibility for the employees who are crazy enough to follow you. The implication is that leaders will put the welfare of others before his or her own. Where does failing fast fit into this ethical framework? Where are the notions of duty to people who trusted you?
I understand that failing fast in certain contexts means listening to data and pivoting, and I support that model when you’re testing a hypothesis or trying to move into new markets. But applying this thinking to the entirety of a fledgling startup feels irresponsible. When we’re talking about growing a business, I’ve found intentional, collaborative action to be more successful than sporadic trial and error. But if your investor is telling you to go big or go home, you may find yourself looking right past the people who are helping you go anywhere.
So how can we disrupt the funding space? That’s for yet another article. But my concluding point is: no matter what type of funding we consider — accelerators, incubators, VCs — these are the truly fungible elements. It’s the financial elements that entrepreneurs should be able to try, fail fast and replace. This might be the value proposition for tomorrow’s funding model.