A perspective on capital, equity and company stages…
There was a time I was interested in investing in a company that was pre-seed. They had a rough prototype, some interested customers and a small amount of funding. I was eager to write this company a check, but something just wasn’t clicking. Finally after 5 meetings they had exciting news to share with me. I was ready. I grabbed my check book on the way out the door. They were going to tell me they finalized a few pilot deals with some great customers, I knew it.
I arrived at the meeting. Literally had my check book on the table. The team looks excited; I feel excited. The CEO begins with a huge smile, “Well, we just found out that we got accepted to pitch at an event and wah wah wah wahwahwah…” I literally stopped listening. After letting him finish I said, “That’s great. Tell me about your customer acquisition. Do you have any new customers interested? Are you getting ready to ship your private beta? How many customers do you have in total now?”
Sometimes raising money is the milestone, but for me, as an investor, it’s usually my idea of a major one.
So as an accelerator what do you realistically need to give to your companies in order to help them get to the next step? How do you even define what the next step is within your accelerator? The accelerator model isn’t all about $XX,XXX for X.X% equity. In many cases it’s not even thought about; you just do the industry standard. That’s fine if you are happy with being the industry standard, but chances are you’re not. You wouldn’t be reading this otherwise.
Here’s some questions you can ask yourself to help determine how much money each company needs and what your accelerator will use to define success:
Only once you have those initial questions answered can you back into how much capital each business needs and how much equity you are going to take. Trying to determine the amount of capital & equity before you know what your model is going to be will cause you to cram down parameters that simply don’t fit.
For instance, knowing these things will help you weed out companies that are either too early or too late. These are teams that would ultimately not benefit from your programming and potentially not be of a benefit to your portfolio over the long term.
If you’re accepting teams with an MVP and the goal is to get them to initial traction so they can raise more capital at a higher valuation you’re going to need to supply them with enough funds to ditch the MVP and develop a proper product that will entice customers to at least spend some money on it. In today’s world that could still well be in the $100K+ range. Whereas, if you’re trying to get them from idea to private beta the amount of funding needed is going to be significantly less.
All accelerators are not created equal and one size does not fit all. You’re a unique little snowflake. Sorry, but in all sincerity, it’s imperative to understand where you’re going in order to provide your teams with the right structure to ensure the optimal outcome.
TLDR; Throw the old model out. It worked for a while, but it doesn’t anymore. Your unique situation drives the structure of your accelerator and you do yourself, your investors and your teams a disservice if you don’t critically analyze your capital & equity stack.
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