The inner workings of startup accelerators have become recognizable even to outsiders: scrappy founders conduct product presentations onstage in front of a room full of buzzy journalists and investors, jacked up on camaraderie and energy drinks.
Fast-forward Much has changed in the way startup launch pads appear, feel, and demonstrate value after two years of a pandemic and even a stint with the return of hacker homes. The value of a typical demo day is being questioned by early investors, who are rethinking signalling risk, dilution, and, most shockingly, the value of a traditional demo day.
Let’s start with a topic that’s hot right now: pro rata.
When a VC chooses not to do pro rata, or follow-on investing, in an existing portfolio business, they are signalling risk. The premise is that the investors who know you best — those who bet on you first — have decided not to invest in you during your next phase of growth, implying that the deal isn’t that good. Negative perceptions can spread to other investors, who, despite what their Twitter biographies may suggest, are risk averse.
Accelerators play an intriguing function in this scenario. If an accelerator like Y Combinator ever grows to 1,000 companies every batch, an automatic pro-rata investment in each one would be both capital-intensive and, possibly unintentionally, weaken the accelerator’s own signal. In 2020, the accelerator, like 500 Startups, revised its stance on automatic pro-rata funding and decided to invest on a case-by-case basis.
“We have greatly exceeded the monies we raised for pro ratas,” the accelerator stated in a post at the time. “The investors who support YC do not have the willingness to fund the pro rata programme at the same size.” “In addition, completing hundreds of follow-on rounds per year has posed substantial operational challenges for YC that we were not expecting.”
“To put it plainly, participating in each round for each YC firm involves more capital than we wish to raise and manage.” We constantly advise companies to keep their budgets small and manage them wisely. We failed to heed our own advise in this case.”
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