The Downside of “Demo Day”

Posted on April 18, 2011. Filed under: startups, venture capital |

Preface: I believe in accelerator programs, am an active mentor in more than one, and think they play a vital role in our ecosystem.  If they are here to stay, which I hope they are, I think they need to evolve.  There is room for improvement.

Lately I’ve been a little conflicted about accelerator programs.  On one hand, I love the support network and education that they are providing to young entrepreneurs.  Giving founders a platform to build on top of, a sense of community, and direction through the early days of product development is an incredible gift to our community.  Where I’m getting a little caught up, is exactly there.  Accelerators are so pro-entrepreneur, that we have almost positioned them as philanthropic entities when, in fact, they are definitely for-profit.  As for-profit entities, we should be aware of how economics influence their curriculum and guidance.

When you join an accelerator, while you’re interests are definitely deeply aligned around value creation, there are some points where their economic interests are actually at odds with those of their founders.  Here are some dynamics to be mindful of:

1)   The accelerator is economically incented to get every single company in their class funded.

This may seem like a no-brainer, but there is actually an opportunity cost to your time.  Starting a company is about having a thesis, building, testing, collecting data, and make decisions about the viability of the opportunity at hand.  In many cases, founders enter into an accelerator in the most nascent stages of development.  Having seen the results of these programs, I would estimate that 25-50% of the average accelerator class, does not, in fact, have a viable business worth pursuing.  For this segment of a class, it is in the best interest of a founder to stop working on the project that they entered into the accelerator with and start looking at other career opportunities, whether they be starting a different company with different people, joining a company that you admire, or just realizing that the startup life isn’t for you.  What I’ve seen from these programs is that every single company attempts to capitalize on or around demo day, and I think this is a problem.  There is so much momentum around completing this rite of passage within the accelerator architecture that kids don’t realize with the acceptance of outside capital they are making a 3-5 year life commitment.  If I were running an accelerator I would be brutally honest and advise the bottom 25-50% of my class not to move forward with financing post-demo day (I actually think this could still work within the math of an accelerator if you could effectively redistribute the talent into the top 50% of the class, but that’s hard to put into a model).

2)   The accelerator is creating a market for the bottom half of their class by exposing them to weak investors.

There’s a reason that accelerators invite 300-500 investors to every demo day.  It’s because that’s how many investors are required to make a market for deals that shouldn’t get funded.  Accelerators mix professional investors in with valueless me too investors and almost confuse those me too investors into thinking the accelerator’s assets (each startup in an accelerator is an asset given the equity position that the accelerator holds) are attractive by seating Joe Shmoe next to Mike Moritz and suggesting that Joe Shmoe is now in the flow of tier 1 deals.  The market created in the demo day accelerator environment is not reflective of the overall market, and this availability of capital mutes important negative input from the capital markets, therefore unnaturally deluding the bottom 50% founders into believing their company is worth that 3-5 year commitment .

3)   Demo days create an environment for both entrepreneurs and investors that encourages unthoughtful partnership.

Big VC’s and dilettante angels alike approach demo days as though they are going to the supermarket.  They listen to thirty 2-10 minute presentations and then are encouraged to “pick one or two” from the batch. The session breaks, founders and investors are thrown into a room together, and investors walk around committing $100K checks to their “favorites.”  What a terrible way to enter into a 5 year partnership.  As a rule, I will not invest in a single accelerator company without at least spending an hour or two talking through their business and getting to know them before or after a demo day.  There is a manufactured urgency that comes with the demo day environment where I believe careless partnerships are being formed.

So yea, I’d like to see accelerators evolve from what I view to be a 1.0 model, and maybe the first place I’d start is with the destruction of “demo day mentality.”

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21 Responses to “The Downside of “Demo Day””

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GREAT post, Jordan! Totally spot on analysis and confirms many of the thoughts I had after a recent demo day.

It felt like so much of the effort of the accelerator — maybe as much as half of the time — had been around structuring a solid pitch, which is a poor use of time.

It also led to very formulaic pitches that suggested there’s one way of building a business and giving a pitch. It lacked creativity and originality.

Your most important point is about building a relationship with your investors. I understand the thrill for young entrepreneurs when someone wants to hand them a sizable check after 15 minutes. It validates them in a measurable way. It also tells them that all the hard work they put into the pitch led to the reward they were hoping for, in record time no less. But for many, it will end up costing them in countless ways as their business goes forward. I’d expect a wave of blog posts in a few years about the downsides of taking investment dollars in this way.

Overall, I agree with you that accelerators are a positive addition to the ecosystem, IF they can get their incentives aligned with the entrepreneurs they’re meant to serve. Great topic — thanks for raising it!

Jordan,

I agree with a lot of what you’ve said – which is why I’m building something different. Solving real business problems in social media is my focus. Would love your insight and praise you for sharing the way you feel.

Any chance we could connect? Would love to gain your insight.

Travis Wallis
Curator, The Customer Development Accelerator
Peoplebrowsr.com
Travis@Peoplebrowsr.com

So glad you posted today. Hope you’ve been well.

While I would love to be in a closed room with people interested in writing $100K checks to me – sounds like an episode of Fantasy Island – I too am concerned about the outcome of making things too fast, too easy and cheaply attainable and failing to invest a proper sense of mission in the entrepreneur.

By nature I must have a meaningful and personal connection with people. In order to make them successful, I must care about their outcome and invest something of my own interest in that. While I’m not talking about the need to be “besties” with everyone, I must feel an alignment of goals and a resonating motive. This has helped in sales, leadership and friendships in my life. It also alienates me from establishing a commitment only through casual contact – unless that casual contact has quality and depth – “alignment”. As a person and a business man, I simply need to have that.

I want to make my investors a lot of money, preferably not too many investors, preferably a whole lot of money. To me it is a key, overarching goal to be used in building a business and influences design and strategic decisions – a really great outcome. “You give me the opportunity; I’ll reward your faith and continued trust”.

Surely I’m building a company to change my personal outcome, but I’m also doing this to capstone my own career (and achieve other goals like building a strong culture, improving hundreds or thousands of lives) and I want to return the faith of my investors by the truck-load; as a result I want to have a meaningful connection and relationship with the people that help us get started. I’m sensitive and introspective; I would worry about easy investment and what that means when I’m no longer “the favorite”.

The second issue that resonates is the commitment required to build a company beyond a startup. I do not think that many people can appreciate the entrepreneurship experience (even without success it is painful, difficult, unpleasant), but at some point that experience changes and a different kind of hard work is required – that required of growing a company, facing drudgery and relatively boring challenges compared to that of the ‘start’.

I suppose this could be the distinction between being a founder and startup and reaching success and growing. Most of the young folks I speak to who are interested in launching a startup do not have a long term view of a greater company or business. I have had discussions with several people in consumer web and their guidance seems to come from expectations of early acquisition and a double rainbow exit.

I really want to build lasting value and grow a company with multiple products, mergers and acquisitions and that has affected product, approach and how I hope to align funding. I am sure there are plenty of entrepreneurs that are building companies to last, but I feel a little alienated from the mindset of fail-fast, iterate and exit.

Don’t get me wrong, I’m not criticizing the accelerator/incubator/more-is-merrier approach; as a social pluralist I think that is awesome. Any time there is an opportunity for expanding scope and reach of capital, this is incredibly beneficial. Yet I also worry about consolidation of investment and attention to these centers as effectively creating a new clique and the success of the few ultimately retarding the opportunity for those outside the clique.

I am concerned that emphasis is placed on failing or succeeding “fast”. I am concerned that these programs will engender a greater sense of elitism which will continually narrow innovation as people conform to existing ideas, business models and behavior to be accepted. And from there we’d go from Fantasy Island to Shutter Island.

Sounds a lot like speed dating and the investors are a bit slutty. Who knows if these investors are creeps or genuinely concerned about you and your ideas. You’ll never know unless you spend time with them first. Ask your potential investors out on a few dates before committing to a relationship, cause they just might be crazy, power-hungry, destructive monsters deep down in their hearts… or the investor of your dreams, which brings me to an interesting questions. Do startups have investor soul-mates?

really good thoughts, jordan. thanks for sharing.

Thought-provoking piece.

Do you think the economic structure of accelerators overemphasizes fundraising as an end goal vs creating a successful business?

I worry about entrepreneurs who should create lifestyle businesses getting involved with accelerators too early.

I do think fundraising is overemphasized in accelerators.

I think that depends on the accelerator. YC definitely devotes time to giving advice to and thinking about fundraising, but that time pales in comparison to what we spend simply working on product.

The motto is “Make something people want” for a very good reason. It doesn’t matter if you get funded if you build something nobody wants to use.

Jordan, interesting post and a well written argument.

If you eliminate the Joe Schmoe investor from the demo day, perhaps that resolves one of your concerns. The Techstars demo day had legit investors, I didn’t meet any investors in the room that I would catergorize as Joe Schmoe. I’ve also attended the Y Combinator demo days and same is true for them.

There is value to the Founder to focus some of their time on presentation skills, something that executives need to be able to do. Regardless of whether the company raises funding from the their presentation, the demo day is a good use of time for the presenter. This also provides that community to see what they have been working on the last three months.

In addition to the demo day, the accelerator allows investors to preview the companies before hand, so the best companies will have a lead investor before the demo day. If you don’t have a lead investor prior to the demo day, it could signal the quality of the company is not so strong. Accelerators also make one-on-one introductions to potential investors beyond who attend does/doesn’t attend demo day.

It seems to me that you are correct in the thesis that Accelerators are incentivized to get each company funded. You mention that some companies could be rolled into others in the program. If you this, than you need to change the equity ownerships, where instead of investing in the company, you invest in the founder. Saad Khan of CMEA Venures wrote an article about making investments in people rather than companies, this is literal and not figurative. As an example, rather receiving 6% ownership in a company, assuming there are three founders, you would receive 2% in any company they start with x number of months. So, a rollup scenario would still benefit the accelerator as they would increase ownership in one of the stronger companies, assuming one of the companies wants to bring the founder from the dissolved team onboard. Don’t know if this works, but it could reduce the need that a company that was selected to the accelerator to make it to demo day.

A few counterpoints:

* Some accelerators give the top investors office tours and access of their companies prior to ‘Demo Day’, and also let them lead talks and be mentors, so I believe that (a) some thoughtful partnerships are formed during accelerators; and (b) top investors do get special access and hype, if not special seating.

* Every investor must decide what to do about the bottom third of their portfolio. I have to assume that incubators spend less time promoting their bottom 1/3rd to investors, as it would lead to bad relationships down the line with investors.

Check back with me at the end of the summer and I can tell you what’s true :)

Jordan,

absolutely spot on piece. A couple quick thoughts:

– I think that’s the piece Paul Graham would have written if he was not in an obvious conflict of interest with YC. When you compare this type of accelerator model with YC, a couple important differences emerge:

— YC has many more companies than the average East Coast accelerator: the entrepreneur/investor ratio is much more balanced and so is the mating game that is seed funding.

— YC takes people without an idea and even people subject to the condition they change their idea. Many start working on the product they present on Demo Day less than one month before Demo Day, having (been advised to) trash their original, and sometime radically different, product.

I love what accelerators are doing for the NYC scene, but your thoughts are spot on how parts the larger NYC culture (the importance of appearance, status-based networking, juking the stats) still sneaks in the tech scene.

Your post goes hand in hand with:

– Matt Mireles’s latest post on the heroes of the startup scene http://bit.ly/cip9Lx
– Roger Ehrenberg’s http://informationarbitrage.com/post/4688992063/the-biggest-challenge-in-vc-investing-the-follow-on

One of the best pieces of tech writing I’ve read in a while, bravo.

Roberto

Hard truths = great post.

[...] The Downside of “Demo Day” « Jordan Cooper's Blog: startups, venture capital, Hyperpublic [...]

[...] The Downside of “Demo Day” Preface: I believe in accelerator programs, am an active mentor in more than one, and think they play a vital role in [...] [...]

[...] The Downside of “Demo Day” « Jordan Cooper's Blog: startups … [...]

i think you bring up some good points, but i will make a note that as far as #3 goes – smart founders won’t take money from people they don’t know.

sure, we got commitments on demo day from a bunch of people… some i’ll take money from, but those are people i’ve already known and met with over a longer period of time… the guys i don’t know are going to be hard-pressed to get in on our deal.

As an entrepreneur from Finland I hope we had more of this kind of problems in Europe. ;) Probably depends on the program but I don’t think there are 100k checks flying around in any demo day. You would always get to know the team & business very well before you would invest, no matter demo day victories. But as you said, maybe that’s just good.

Here’s a thought – is the equity position accelerators are taking a bad thing? This, as you said, binds the team and the accelerator together and puts it in the best interest of the accelerator to get all of the companies funded. But we all know a group of 20-22 year olds will think just about anything is a world-changing idea, and the reason they get into accelerators is that:

a.) the accelerator can never know if the entrepreneur is right and takes the bet

b.) the accelerator can spot smart people and good teams, who might then realize idea number one was bad but start working on something much better.

So, instead of equity, how about charitable grants with options to invest for equity at the end of the accelerator period if the idea is going somewhere or top-level investors (veritable angels/VCs) come in? This means the accelerator has the amount of money riding, but does not bind his/her time into getting companies funded that are, as you say, not worth it.

These accelerators won’t probably be run by private investor types – they’re in it for the money. But universities and foundations can be a very central part of this type of thought – it’s in their interests to spawn an ecosystem and they get rewarded when a few superstars emerge and the university builds its brand. Check out aaltovg.com for an example out of Finland.

Jordan-

Good post, it’s why I’m for service based bootstrapping. Make stuff, help people, do your ‘gig’ in your spare time.

-Chris


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    I’m a NYC based entrepreneur. I think there is one metric that can be used to measure the value of a human life and that’s impact. How did you change things? How many people did you touch? How different is the world because you lived in it and how positive was the change that you affected? (p.s. i don’t use spell check…deal with it) You can email me at Jordan.Cooper@gmail.com

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