How YC Became The Dominant Accelerator and Why All VCs Are Trying to Copy
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How YC Became The Dominant Accelerator and Why All VCs Are Trying to Copy
Every Venture Capital Firm is starting an Accelerator. Over 10 years running one, here are the things I feel other accelerators have failed at.
The State of VC Accelerators at a glance:
The most popular “startup accelerator” is YCombinator. They have championed thousands of founders for the last 17 years through their program and really invented a model for startup investing that allowed founders to experiment and validate their idea for a small amount of capital. Their original deal was $15k for 7% and have moved to a more nuanced deal with a $500k investment for 7% plus a bit. YCombinator was the first money in startups like AirBnB, Coinbase, Stripe and the list goes on!
In the last month, there has been a resurgence in new accelerator programs launching all over the place: A16Z with “SpeedRun”, Better Tomorrow Ventures with “The Mint.”, and so many others who have been mentioned to me in passing.
As someone who modeled their business model after YCombinator, I feel I am asymmetrically qualified to explain the emergence of new accelerator programs and why it could be a great thing! Yet not as simple as everyone will believe.
YC started with $200k, Boost VC started with $500k.
Things to know quick:
No matter who you are in Venture Capital, you are jealous of YCombinator (YC). YC has done 6 things that you should be jealous of:
In 2005 the founders of YC: Jessica Livingston, Paul Graham, Robert Morris and Trevor Blackwell started with $200k and an idea to create a new type of venture firm.
Whether on purpose or by nature of having a smaller amount of money in the fund, they stumbled upon a talent pool of amazing founders starting companies right out of college - the cost of starting an internet startup had dropped dramatically, and investments of $10-15k could make a dramatic impact on the validity of a startup and founder.
They invested synchronously rather than asynchronously. Meaning they held an application for a limited time, and it focused the founders in “Batches” of investment —- Which over time has been an incredible marketing channel as well as deal flow channel.
They created the SAFE: the Simple Agreement for Future Equity. Carolyn Levy, the inventor of the SAFE while at YCombinator changed the way early stage funding happened and made it far more founder friendly and streamlined. This has also been the greatest under-current marketing methods across the entire VC ecosystem… everyone uses the “YC SAFE” to invest, its just easier.
They shifted the balance of power in a fundraise from the investor to the founder. The founder now has enough education about fundraising to say “This is the valuation we are raising at” making the decision a yes or no for the investor rather than a negotiation.
YC’s Demo Day is the most powerful event in the startup world. Hundreds of companies and thousands of investors converge on a specific day to trade equity for cash. It drives demand for investment to a moment in time. I imagine it being the modern day “Buttonwood Tree”.
I believe that the 6 things above made them who they are: the most powerful network in startups.
What is happening now?
The market of startups has changed in the last few years. The market has moved from “flush with cash” to “limited cash”, and may move to “Scarce cash.” This environment has led many venture funds to attempt the YC model for various reasons:
Do more deals.
Get more equity.
Get into deals earlier.
All of these for a lower “Cost”
Now before you decide “I’m a genius, I’m just going to launch an accelerator.” I want to note a few non-obvious things about being an accelerator. Which Boost VC is (we call it a Startup Onboarding program… but it’s an accelerator we have run 19 times).
We are starting to get into the weeds on this, so I understand if you stop reading, but those were still are reading - you are probably interested :)
The Top Mistakes Accelerators Make
They do it exclusively to convince a startup to give up more equity for a lower amount of money.
I have no problem with greed holistically, and innovation. I think that both help push the world. forward, but if you are thinking “Oh, yeah, I get to turn the screws on startups.” your accelerator will be short lived.
If you do not invest time into the program.
Startups join accelerators for a few reasons: Cash, Network, and accountability. If you are designing a program around your portfolio, make sure you are adding value to the startups.
Experience vs. Curriculum
Look, there are broad playbooks for startups, but the reason that startups work is because they work outside the lines of the current system and grow in the shadows. If you make the accelerator about “Learning” and not about “experiencing” it will just be a very crappy accelerator that takes time away from the startup, rather than adding value. This is broadly where academic accelerators have fallen short.
Time
Funds have a business model, which is why the accelerator model feels very approachable, “High equity for low valuation, lots of deals!!”. I find that most investors don’t have the patience for the accelerator model. Boost VC still has investments that are at the Series A level from 10 years ago. 10 years! It takes time for startups to make it from inception, and that’s really what accelerators are betting on.
One of my friends recently gave me a tip on shooting a basketball, and he said,
“you just want to give it a chance of going in.”
So it’s not about hitting a swish every time, it’s about getting the ball close enough that you give it a chance. I don’t think that most investors are willing to give their accelerator program a chance to work. They want quick results when it takes 10 years for the network to compound.
Now for the good.
I believe that launching accelerators gives VCs empathy on the journey that startups go through. They have to get more operationally focused, and closer to their customer than ever before.
It also means that more startups will be given more shots on goal than ever before. More talented people taking shots on goal is better for the world.
So many startups will be starting a mission… let’s see how we can help them finish their missions.
Reply / Like / Share to let me know if you enjoyed this break down or if there’s more information you would want.
How YC Became The Dominant Accelerator and Why All VCs Are Trying to Copy
As a founder I've been approached by numerous -pardon my expression- sketchy so-called accelerator programs over the past few years that I resonate a lot with this article. Time and time again I bump into follow-on-only funds soaking up founder time with difficult-to-discern value add, sometimes even trying to charge founders $5k - $20k to join. It really refreshing to encounter Boost and the minority of others holding true to the founding principles of what Accelerators are meant to be. Thanks for what you do!!
Great post and also loved your book. I would be curious to hear your thoughts on whether the gold-rush towards accelerator model is just to copy YC's success, or is part of a general re-orientation towards early stage rounds as the highest-performing investments when compared to growth rounds. Eager to learn more!