Have startup accelerators become the modern day placement agent?
Fresh out of college in 1998, as most of my friends moved to New York City to begin careers in finance or consulting, I took a road less traveled, moving to San Francisco to take a job with Robertson Stephens & Co, then a leading boutique investment bank specializing in technology. After a few months working on IPOs and secondaries, I gravitated towards a lesser known group hidden away on a separate floor who were helping private companies position and market themselves for venture capital investment. As the first analyst-level employee to join the Private Capital Group, I learned about this cottage industry called venture capital and enjoyed unfettered access to startup management teams. It was my first exposure to early stage technology investing and it fascinated me.
At the time, in the late 1990s, there were almost no personal blogs and Twitter was still eight years away from conception. Email was still a relatively new communication medium. Angel List and the concept of "crowd funding" were nowhere to be found. As a result, connecting with the right venture investors was far more difficult than it is today. This created an opportunity for investment banks and advisory firms to serve as a conduit between promising startups and venture capital funds. There were also twice as many investment banks in those days so this was an opportunity for Robbie Stephens to engage early with companies who they might want to work with later on an IPO, and this happened a few times with our clients between 1998 and 2001. While I enjoyed this role of placement agent as an Analyst and later as an Associate, I always felt that the best entrepreneurs shouldn't need our help and the best investors shouldn't want it. And as the numbers proved out, our success in generating fees often came at the investors' expense. Over time, a few things happened that made venture capitalists easier to find:
- As more startups issued public stock through IPOs or were acquired by larger companies, the investors who supported these entrepreneurs in the early days became more well known.
- In some cases, entrepreneurs who gained repute by building successful businesses switched sides, becoming investors, and brought their networks with them.
- Online publishing (and later social media) took hold making it easier than ever before to reach out and connect.
- The innovation economy began to capture more of our collective mindshare leading to its central players - entrepreneurs and investors - gaining attention.
Combined with conference appearances, television interviews and other outlets providing opportunities for discovery, the venture fundraising process became more transparent. As venture investors became easier to find, the need for placement agents declined to a point where I believe it began to send a negative signal - particularly in the first few rounds of funding. There are always exceptions (one successful early round of funding in 2010 comes to mind) , but nine times out of ten, the involvement of a placement agent raises more questions than it answers for me. Startups are hard and raising money is one of many challenges along the way. If a CEO needs help with this basic sales function, how will they conquer other challenges along the way? I met with a company recently through a placement agent that had an interesting value proposition and some good early traction. On several occasions during the meeting, the placement agent interrupted the founder and answered the question for him. In all fairness, twelve years ago as a cocky 25-year old, I was probably guilty of doing this too, but it presents an obvious problem. After the money is in the bank and the placement agent long gone, the founder won't have the guy by his side answering the tough questions.
I think accelerator programs, to some extent, represent a version of an evolved, modern day placement agent from the 1990s. They provide similar coaching and ultimately, help the company position themselves optimally to attract venture investment. In the early days of YC, when this was still a novel concept, we saw several success stories come out of the model. Today, as dozens of accelerators compete for attention around the world, in some cases accepting larger classes than before, talent is spread thin and I believe quality erodes. What hasn't changed is the structure of the fundraising process that is optimized for speed and efficiency. Like the IPO-style roadshows we organized for private companies in the late 1990s, today's accelerators gather as many early stage investors as possible into the same room to unveil each new class of companies. What follows is often a bidding frenzy where prices grow inflated and investors are pressured to make quick decisions. The similarities in function between today's accelerators and yesterday's placement agents are many.
Hunter Walk wrote a great post this week on why he hopes to get to know teams well ahead of demo day. I think it probably rings true for most seasoned investors, and especially for those who came from operating roles. We're not interested in sitting through a pitch from a founder we barely know and saying "yes" or "no" when it's over. When asked to do so, as I was recently, it will most likely be "no thanks." Don't confuse this with an inability to make quick decisions. Under the right circumstances, we will absolutely make a quick decision to invest, but several things need to line up for this to happen. More often, if you're someone we're getting to know for the first time, we want to spend time together and understand how you think and approach problems. We've come from startups ourselves so want to roll up our sleeves and help you build a great company. Before committing to do that, we want to make sure it's a good fit. And you should want to get to know us for the same reasons. Building a company is a journey and taking venture capital is one of several commitments a founder makes along that path. Mark Suster wrote a post in his early days as a venture capitalist discussing investing in lines not dots and he's referenced that post as much as any other over the past few years because it comes up again and again. Most venture capital funds have a 10-year life because it takes that long for most businesses to mature. Let's get to know each other before spending the next decade together.
Last week, a company that I've been getting to know invited me to join one of their internal strategy sessions. I came away from the experience with a better understanding of how the founders approach problems and a clearer sense of whether I can add value as their partner. This is the type of relationship-building that I find incredibly valuable in the early days of a founder / investor courtship and I think the value is mutual.