The next question we’re looking at as we explore the world of accelerator programs is why investors get involved. News a couple of months ago that Yuri Milner and SV Angel plan to offer every Y-Combinator team a $150,000 convertible note put this all in headlines, but investor motivations aren’t always straightforward. In fact there are a range of investors who get involved for a range of different reasons.
Some angels invest directly into accelerator programs, some invest in the startups during or at the end of the accelerator program, others simply participate in events and mentoring. You might think that angel investors are a completely hard headed bunch and will only invest because of the return they might get but that’s certainly not universally the case.
The main reason for getting involved is that they get to make more informed decisions about companies to invest in at the end of the program. After three months of intensely working on a startup, a number of things are much clearer. Does the team work well together under pressure? Is there a product market fit? Can they pitch well? As an angel investor, it’s actually quite hard to get a really good level of information from very early stage companies but accelerators make it much easier.
We also heard a lot of stories from angels that one reason they got involved was not to invest and get a return directly but because they could see benefit in the long term of improving the local ecosystem for startups (even if that would take a decade or more). This was less of a reason for programs in the Bay Area but in New York and London, was often cited as a motivation.
Another reason people mentioned was that it’s good fun. There’s a buzz associated with getting involved with early stage companies that is absent from other roles they might take on in larger firms or other types of investing. They seem to get involved because they find it interesting and enjoyable rather than relying on any direct return.
The people with bigger pockets in the world of high tech investing are the venture capital firms. In the UK they have backed Seedcamp and in the US, Y-Combinator is backed by investment by Sequoia, perhaps the most successful of the Silicon Valley venture capital firms.
One problem that accelerators solve for VCs is that they create new deal-flow. A number of people have said that this was the compelling reason for supporting Seedcamp in London in the early days — that there simply weren’t enough young founders and companies having any contact with the world of investment. The venture capital community has an interest in there being a far greater number of good companies. If they can attract talented people to think about setting up startups rather than going to work for large organisations that’s good news for the whole sector.
There is a wider issue which came out from some of our interviewees that accelerators are one example of a profound shift in the venture capital industry as power shifts away from venture capital firms and towards founders and angel investors. Dave McClure is one believer. But I’ll come back to that in another post.
- Yuri Milner, SV Angel Offer EVERY New Y Combinator Startup $150k (techcrunch.com)