Post Category → Accelerators

Pre-Seed Funding with Post-Money SAFEs: Revisited in 2024

There are few markets that evolve faster than the world of startups, for unsurprising reasons. I figured it was time to revisit some of my writings on seed and pre-seed funding given how much the market has evolved since 2019-2021, when I last wrote about this topic in depth.

First, a brief history:

1990s – Long before the term “pre-seed” was even a thing, before the SaaS revolution made it even conceivable to start building a tech company with only a few hundred thousand dollars (or less), almost all early startup funding occurred as a complex preferred stock round; what now is reserved for Series A and larger seed rounds. It was a very different world from today.

Early 2000s  – Then convertible notes, once reserved mostly for “bridge” rounds in between preferred stock financings, started being used for seed funding; a natural evolution for rounds that were getting smaller and couldn’t justify full equity round negotiation time or costs. It worked relatively well. We also saw in this era the emergence of “series seed” preferred stock templates, a slimmed-down version of the more complex NVCA, that allowed you to raise a seed equity round for about 40-50% less in legal fees. These also got a decent amount of traction.

2013 – Then the Pre-Money SAFE, which is a convertible note without interest or maturity (effectively) was released around 2013. Founders started (candidly) abusing that instrument by raising Pre-Money SAFEs for years and years while obscuring the real economics behind what angel investors were funding. This was do-able because if your second, third, or fourth SAFE round has a pre-money valuation cap, but nothing capping the post–money, your newest investors can’t really know what % of the company their investment is buying without making you model out all the conversion math.

They could, for example, be putting in $1 million at a $49 million pre-money cap, which would suggest a $50 million post-money valuation, but they were in fact getting way less than 2% of the business because numerous unmodeled earlier SAFE rounds were pushing up the post-money. The post-money valuation is what really hardens a startup investor’s ownership percentage.

2018 – In late 2018 Y Combinator released the Post-Money SAFE. It flipped the economics of SAFEs to have a post-money cap, making the % purchased by investors far more transparent and immune to this issue of companies obscuring a deal’s economics. This was a good development, and the Post-Money model of valuation caps has since gained substantial market share.

But there’s one very big problem. The solution YC devised went much further – to the benefit of investors (including themselves) –  than was necessary to let investors know what % of the cap table they are buying on the day they invest. It further promised those investors complete non-dilutability of that percentage until the SAFE converts, including through subsequent SAFE rounds with higher valuation caps. This makes the Post-Money SAFE far harsher economically (to founders) than any other instrument in the history of startup finance.

YC itself has made an enormous amount of money by implementing this new math into the deal it gets with its own accelerator’s startups. I’ve seen YC companies start with giving 7% (the usual deal) to YC, but by the time the SAFE actually converts, after two or three more convertible rounds, the YC % is functionally equivalent to having received 10% or more years earlier. The smartest YC companies get ahead of this issue and raise a seed equity round as soon as they can after exiting the accelerator, cutting off this problem by converting all their SAFEs, but most don’t. It ends up costing them dearly.*

That’s the history.

2024 – Today, pre-seed and seed rounds have evolved such that you very rarely see an equity round that is smaller than $3-5 million. Many companies raise more than $5-10 million as convertibles (SAFEs or Notes) before doing an equity round.

Given the current landscape and investor expectations, we typically advise founders to not swim too hard against the tide, but also not mindlessly drink the overly “standard” Kool-Aid. Yes, templates like the Post-Money SAFE have gained significant market share, but what you don’t hear as much in the (simplified) data is that they are still being negotiated, particularly on the anti-dilution economics issue discussed above.

Many founders are very uncomfortable with promising their SAFE holders anti-dilution for years, given how equity rounds have been pushed further into companies’ growth. Six years after the Post-Money SAFE’s release I still have not heard a logical argument for why if a startup successfully closes $X million as preferred stock, all prior investors get diluted (what normally happens), but if it happens to be a SAFE round (same valuation, same amount raised), no investors get diluted. Why is the paperwork structure of the round relevant to whether investors get diluted?

Many smart founders modify the Post-Money SAFE (lightly) to address the investor-biased anti-dilution issue. I posted a public redline for this years ago, available here, along with other info on the economic implications of making this modification. Changing just a few words in the Post-Money SAFE can, for a company that achieves at least a $100 million exit, amount to millions of dollars in the pockets of common stockholders (founders, employees) instead of VCs or accelerators. Anyone who thinks at least trying to make this change isn’t worth it, out of some fear of “friction” – isn’t (IMO) defending their cap table enough.

Remember that this modification still promises investors the cap table percentage that the post-money valuation cap implies. If they put in $1 million at a $10 million post-money cap they are getting 10% today, effectively. What the “fix” does, however, is ensure that 10% shrinks pro-rata if you do a new SAFE round in 6-12 months with a higher valuation cap. Because that’s what would happen if you’d raised that $1 million as an equity round instead, or as a convertible note or pre-money capped SAFE. This idea of promising non-dilution to SAFE investors was completely novel, unnecessary, and introduced by YC, costing founders a lot of money. 

Of the founders I observe actually trying to fix the Post-Money SAFEs problems, a material number (but not all) have it accepted by their investors. They send a simple markup early in the process, a little discussion happens, and investors either OK it or they don’t. It ultimately comes down to leverage, which no lawyer can change for you.

For founders unable or unwilling to push for this change, other possibilities are:

A. At a minimum understand the anti-dilution issue, and factor it into your modeling of subsequent rounds. View future SAFE dilution as stacked on top of what was previously given to SAFE investors. The earlier SAFE holders are not themselves being diluted, which means you (the founders) are being diluted more. Your valuation caps in future SAFE rounds thus need to be higher to account for the more aggressive founder dilution.

B. We’ve also seen some founders, instead of tweaking the Post-Money SAFE, simply switch back to an old school pre-money formula. I personally find this a bit awkward in the context of investor expectations of 2024, but it certainly happens sometimes.

C. Convert your SAFEs as soon as possible. This is the advice I give to YC founders, and the advice I give to anyone who has raised a substantial amount of money on unnegotiated Post-Money SAFEs. Cut the anti-dilution off as soon as you can by raising a seed equity round, even a small one. See my article Myths and Lies About Seed Equity Rounds to dispel any boogeyman stories you’ve heard about how equity shouldn’t be used until Series A.

Those stories are often driven by investors holding post-money SAFEs, who make way more money staying unconverted and therefore undiluted even as you raise more money and increase in valuation. Investors can be great sources of advice, but they are not your best friends. Cap tables are unavoidably a zero-sum game, and investors’ advice is very often designed to maximize the amount they get. Watch incentives.

Startup finance continues to evolve. Templates are useful as starting points of a negotiation. They’ve dramatically streamlined the earliest stages of funding, as the number of pre-seed and seed funds (and deals) has exploded. But be skeptical of anyone suggesting that those templates are never negotiable. They most certainly (often) are. The tiniest amount of negotiation can save you and your team millions of dollars. Don’t foolishly leave money on the table.

If you’re raising a pre-seed or seed round, feel free to reach out to us. We often do virtual office hours to help founders better understand these granularities as applied to their market context.

*YC will not modify their own Post-Money SAFE for their cohort of accelerator companies. The only way to minimize the economic harshness of its terms is to raise a small equity round as soon as possible after YC to convert their SAFE. 

Lessons from Elon Musk (Mistakes) for Startup Governance

“Thou shalt have no other gods before Me.” – The 1st Commandment

This post is going to discuss certain high-stakes financial happenings with one of the great heroes of the Startup / Tech Ecosystem of recent decades, and indeed someone I deeply admire for his technical acumen (political opinions are more hit and miss): Elon Musk. Depending on your orientation, I might even be called a “fanboi.” I am particularly a big fan of his achievements at Tesla and SpaceX, as well as his efforts (however imperfect and ham-fisted) to reorient X fka Twitter toward a more free speech philosophy.

Elon Musk had his hand slapped big time by Delaware courts, having his >$50 billion Tesla compensation package annulled for lack of appropriate Board governance and process. He is now very angry and campaigning to have Delaware dethroned as the international destination of choice for corporate law. His view is that Delaware has treated him unfairly by overriding the choices Tesla’s Board, clearly controlled by him, chose with respect to determining Elon’s compensation package.

On numerous occasions I’ve heard Elon referred to, particularly among startup players, as a “god.” That is understandable, because his technical and business talents certainly get close to once-in-a-generation ultra ultra elite level. An apex Navy Seal of an entrepreneur.

For that reason, I included the 1st commandment above. Completely putting aside religious theology, the intellectualized interpretation of the 1st commandment goes something like this: do not deify – in the sense of treating as infallible and entitled to unconstrained deference – something or someone that doesn’t deserve it; which is to say no one and nothing deserves complete worship like “God.” Everything and everyone, no matter how good in a particular context or domain, has limits and points beyond which they need to be constrained, lest very bad things begin to happen.

Inarguably (I think) good advice. Only the naïve treat talent within a specific technical domain – legendary impressiveness notwithstanding – as reason for a single person (or even group of people) to override the 100s of other kinds of expertise and talent that the world also depends on.

As someone who’s worked deeply for over a decade in various startup ecosystems, watching numerous companies rise and fall (for all kinds of reasons), I’ve come to analogize entrepreneurial energy to something like uranium, gasoline, or the sun. All highly concentrated, tremendously powerful sources of energy. The core drivers of the economy. Immensely valuable and important.

And yet, used in the wrong way, without appropriate processes, checks and balances, they kill and destroy: explosions, cancer, apocalyptic painful fire. It takes an appropriate system to channel that energy into something productive and valuable. Our sources of entrepreneurial energy deserve tremendous respect and freedom – something which American culture is uniquely good at, but they’re not gods. They too need refinement and constraints, or they’ll kill us (or at least wastefully burn enormous amounts of money).

Notice the word system in the term startup ecosystem. What has turned the world of American venture-backed startups into an economic powerhouse that is envied by the world is not, and never has been, simply bowing to entrepreneurs wholesale, giving them 100% unconstrained power to build whatever and however they see fit. The actual startup ecosystem has never deified genius entrepreneurs. Instead, it has placed their energy and talent within a dynamic, evolving system of independent forces, each with their own guiding principles and incentives, that shapes and channels that energy into world-changing enterprises.

Professional venture capitalists – not the unbundled dumb money funds swirling the ecosystem in recent years but actual professionals with deep networks and expertise about startup and growth playbooks – are one example of a countervailing force on entrepreneurs. You will hear propaganda in the market suggesting that all VCs are useless and just waste time beyond their willingness to write checks, but this is self-evidently false from even a half-hearted review of the history. Numerous household names in tech were deeply shaped by elite VCs coaching, guiding, and even constraining entrepreneurs when experienced judgment suggested doing so was necessary to keep the energy flowing in a productive direction.

That is not to overstate the role elite VCs have played in the ecosystem. They too are not gods, and absolutely need their own constraints and monitoring to avoid excesses. Many of them are at least as mercenary and capable of financial destruction as the hyper aggressive entrepreneurs who make headlines. But they are a valuable and necessary part of the system that shapes entrepreneurial energy into our elite economy.

Other not-quite revered but still important forces in the ecosystem include lawyers – representatives of the legal system for protecting and aligning interests in a high-stakes economy of diverse players acting as fiduciaries for huge amounts of money – and accountants (auditors) also play an important role. Employees as well. Accelerators, despite their overall decline, are also worth mentioning even if fundamentally they are just VCs of a particular flavor.

The startup ecosystem as we know it is built by setting these players – these forces – to interact, engage, and when appropriate constrain each other. These different constituencies of players do not need to like each other to engage productively – you’ll regularly hear VCs, for example, whine about lawyers. That’s because lawyers on the side of startups very often prevent aggressive VCs from getting their way on contested company issues, when the overall governance calculus doesn’t warrant it. The semi adversarial way in which the players interact is by design; a feature, not a bug.

Imagine a weather system with different forces constantly swirling around and engaging, pushing and pulling, mixing, unmixing, and remixing. That’s kind of how an entrepreneurial ecosystem works. No single force – yes, not even ultra elite entrepreneurs – is so universally good and important that it should completely override all the other forces that have proven themselves time and time again as essential toward channeling all the energy toward a constructive, durable outcome.

Over centralizing such a dynamic ecosystem, allowing one set of forces to take over another, weakening the checks and balances, is usually bad for the market as a whole. One example of this would be venture capitalists controlling the lawyers who advise companies, biasing their advice on conflicted high-stakes issues. I’ve written about this quite a bit. Another example would be businesses hiring sycophants as legal advisors or accountants to misinterpret or misstate laws or financials, denying the open market the transparency and protections that the system has evolved to provide. We see this quite often as well.

The fact of the matter is that Elon had a kind of kangaroo Board of Directors, including his own divorce lawyer, his brother, and supposed “independent” directors who in fact owed much of their wealth to Elon and even vacationed with him; something which may seem innocuous in smaller cases but is material when the executive in question is one of the world’s wealthiest people and can fund some really nice vacations.

Thus when Elon’s compensation package and the process for determining it were reviewed, it was a joke. Amateur hour of the highest order, inappropriate for a Series B startup let alone a public company like Tesla. There was not even a feigned attempt at a professional process. Elon thought himself a god who didn’t need to listen to the legal system or lawyers. The Delaware Chancery Court, a global force in corporate law with tremendous gravitation pull, just gave him a reality check.

While Elon is understandably not happy about that, in the bigger picture it actually reinforces why the American business economy – and Delaware law specifically – is so respected internationally. Nothing says “rule of law” (music to the ears of high-stakes economic players responsible for ginormous amounts of other peoples’ money) like enforcing the rules against the (in this case arrogant) resistance of the wealthiest person on earth.

To be very clear, this is not to say that laws are all-important and inviolable all the time. Sometimes laws should be fudged, even changed. Uber is a great example of a company that thoughtfully broke some laws in order to improve them. Incidentally, it’s also an example of an entrepreneur (Kalanick) ultimately getting out of hand and smart VCs + lawyers playing a constructive role to get the business back on track.

Laws are, in many respects, like speed limits. We can always assume they’re going to be fudged on the margins, and yet where you set them still plays an important role for determining how far the fudging goes. Elon clearly went too far, pushing (metaphorically) 150mph in a 75 zone. However special of a person he may be, and however important his achievements, there is always a point at which the system simply cannot tolerate anyone setting such reckless behavior as an example.

The lessons here for startup governance are straightforward. Legal advisors should not be sycophants – they should not be beholden to the VCs or the entrepreneurs wholesale. The most aggressive players on either side of the table will very often try to hire gladhander advisors so desperate for the work that they’ll rubberstamp whatever, and yet somehow professionals with actual backbones and principles need to be allowed into the room. If the insiders don’t let that happen (because they are colluding), outsiders with their own lawyers will get it done for you, at much higher cost (just ask Tesla).

Founders sometimes misinterpret my writings about corporate governance and “independent” company counsel as suggesting that I’m going to just be a founder CEO’s lap dog. Being independent from the VCs so that company counsel can properly assist the Board in pursuing the interests of the common stock as a constituency (which usually includes all founders and early employees) is not the exact same thing as working for a particular founder. Usually those interests are all aligned, but not always, particularly when someone is excessively aggressive, immature, or uncoachable.

Independent directors should be meaningfully independent, not the CEO’s or the VC’s BFF. Credible processes for setting very high-stakes compensation matter. And no, simply getting a fragmented stockholder vote at the end to “cleanse” an otherwise horrible process is unlikely to be sufficient, particularly in cases fraught with time constraints, information asymmetries, and coordination problems among the stockholders.

This is also not to say that Elon did not deserve to be extremely handsomely rewarded for his spectacular performance as Tesla’s leader. I’m sure his compensation will still be very juicy. I’m sure it would have been juicy even if he had not consciously chosen a captive clown show as his Board governance model. Elon simply should have respected the process – the system – in which he was operating. He chose not to; a classic (quite common) case of an aggressive entrepreneur treating sensible legal advice as handwavy bureaucratic nonsense.

The system pushed back in a language that, short of imprisonment, even someone as powerful as Elon can learn to respect: lots and lots of money lost. Whether he likes it is irrelevant. That kind of assertive pushback is exactly what ecosystems must do in order to stay durable, dynamic, and not beholden to any single fallible, imperfect, definitely not a god player. To repeat: the system is designed to have power clashes. That’s part of how it self-regulates to avoid disasters. There is no other way of going about it.

Elite entrepreneurs are like the star players on the football team. Super important, deserving of reverence, fame, and lots of wealth, but they aren’t – they can’t be – above the game and rules (which can change and evolve) themselves, or the whole thing will collapse.

Corporate governance isn’t everything, but it matters, requiring constant monitoring and calibration to prevent conflict, collusion, and corruption. It has proven itself to serve a very important function in the startup ecosystem. Take it seriously, even if you’re an aspiring Elon Musk.

Postscript: You will notice plenty of VCs using this Delaware <> Musk case to pump up their “founder friendly” credentials on social media, decrying it as judicial activism and whatnot. Always watch incentives. When VCs feel like their own money is being wasted by an entrepreneur, or that their own portfolio company’s governance has gone off the rails, their first thought is “call our lawyers.”

But in this context, all their incentives are to give a soapbox speech about how they believe in founder-led companies and support Elon’s perspective. Costless marketing. I wrote in Trust, Friendliness, and Zero-Sum Games about the marketing dynamics of investors creating excessively “friendly” PR portrayals of themselves. It’s understandable, but founding teams shouldn’t fully drink the Kool-Aid.

Why VCs No Longer Require Warm Intros

Related Reading:

Once upon a time, the startup and VC ecosystem was a very opaque and fragmented place. Each non-SV market had at best a handful of meaningful check writers who were very geography-centric (local) in their funding. Even Silicon Valley had only a few dozen VCs, who very much expected you to move closer to them if they were going to fund you. Seed funds and accelerators were not a thing. The idea of a “pre-seed” round would be considered comical.

In that earlier, simpler time, much discussion revolved around the importance of the “warm intro.” So much so that I had to write posts like: “Why I (Still) Don’t Make Investor Intros.” Venture capitalists used the way that you were introduced to them as an important signal for a founding team’s chops. Candidly, this is not entirely unreasonable. A whole lot of what a founding CEO does is build relationships with key people in the market, and “sell” the vision so that other players will make an incentives-aligned contribution to the cause: join the team, buy the product, write a check, etc. There is some logic to the idea that if a CEO can’t convince anyone credible to introduce them to a VC, well, can they convince key employees, or key customers, or key commercial partners?

Times change. Now the image of elite VCs sitting in their gilded towers waiting for founders to jump through X or Y hoop just to be given 15 minutes to sit in a conference room chair seems… a bit dated. Sure, the go-go years of 2020-2021 have ended and we’re now in a bit of a reset of power dynamics between founders and funders, but nevertheless the whole process of how top founders get connected with VCs today looks very different from 10-15 years ago. In fact, at the high end of the market, it’s flipped. Rather than founders scrambling to get intro’d to VCs, it’s now VCs scrambling to get intro’d to founders. Multiple articles were written about “VC burnout” as VC partners and associates were, in some cases, under extreme stress trying to get access to good deal flow.

What changed? The Disney-fied story you’ll hear is something like “VCs have become more enlightened.” Relying on intro’s was too “good ol’ boys” chummy. It excluded talented people without connections. It reinforced biases and prejudice. Now our far more modern funding ecosystem is “open,” transparent, meritocratic, with a more level playing field.

Okay, perhaps. I won’t say that narrative is entirely false, but it’s most definitely incomplete. The bigger-picture reason is: competition, and a proliferation of alternative signals for team quality.

In How Angels & Seed Funds compete with VCs I wrote about how changes in the structure and timing of funding rounds produced an entire industry of check writers who preceded VCs in a company’s funding pipeline. Angel investors have been around for a long time, but as the SaaS revolution started dramatically dropping the cost of starting a startup, resulting in an explosion of people trying their hand at entrepreneurship, angels started professionalizing. You now had angel networks and syndicates that could collectively fund an entire round of millions of dollars. They were soon followed by “seed funds,” leaner, faster VCs who led rounds much earlier in a company’s life-cycle relative to more traditional VCs who typically dove in around Series A.

Parallel to the professionalization of angel networks and seed funds came startup accelerators, which were a result of the then-newly emerging seed ecosystem, but also a catalyst for its further evolution. The explosion of young startups who weren’t yet looking for millions of dollars, but for whom a few hundred thousand would make a meaningful impact, begged for a university-like talent sorting service provider that could apply a branded signal onto credibly vetted teams, thus helping them get later funding.

For a period of a few years, there was an elegant symbiosis between the “seed ecosystem” of accelerators, angel networks, and seed funds, on the one hand, and larger VC funds who showed up around Series A, on the other; much like how elite universities sort and credential students, for a price, and funnel them into top-tier employers.

We can pause for a moment here to recognize that this development alone significantly eroded the importance of the “warm intro.” Accelerators and angel networks rarely required warm intros. They had “open application” style ways of connecting with founders, which rarely required references or other connections. This meant a higher volume of applicants of more varied quality, but because the checks were smaller (less concentrated risk), and these orgs staffed themselves with people trained (in a way) to separate wheat from chaff, this significantly expanded the top of the funnel for startups entering the funding market.

At the tail-end of the seed pipeline, once you were accepted/funded by a top accelerator or angel network/seed fund, this served as a credible alternative to the less institutionalized “warm intros” of yesteryear. Someone had already put in effort to get to know you and filter you from the volume of B and C-players in the market, and so VCs grew more comfortable taking those meetings even if a classic introduction wasn’t part of the package.

But unlike centuries-old non-profit universities, the seed ecosystem was made up of dynamic businesses and service providers eager to claim more market share. And so they did.

Elite accelerators and other seed players started forming their own later-stage funds, or investing in VC funds much more tightly aligned with their own interests. If there was money to be made in later-stage rounds, why let some other fund make it? Seed players also started leveraging their control over the top of the funnel to exert pressure on later-stage VCs, requiring them to accept higher valuations, weaker governance rights, and other forms of limits on VCs freedom to operate. See: Startup Accelerators and Ecosystem Gatekeeping.  What had started as a nice complement to the business needs of VCs had now evolved into a direct competitor and gatekeeper.

VCs, being who they are (hardly tender souls afraid of competing), were not simply going to accept these seed-stage upstarts taking control of the ecosystem. The stakes are too high. VCs started evolving and competing, in many cases very successfully. See: Why Startup Accelerators Compete with Smart Money. The significant weakening of the “warm intro,” with many 7-figure check-writers openly inviting founders to send cold e-mails, is a result of this competition. If VCs didn’t want accelerators and seed investors choking them off from the entire pipeline of top startups, they had to get comfortable stepping out of their gilded towers a bit and spending more time filtering through the masses themselves.

Thus the erosion of the VC warm intro is less the result of a newly enlightened VC industry, and more a response to changing market dynamics requiring VCs to loosen up if they want meaningful deal flow. Making the warm intro merely optional is just one way VC is evolving. VC “scouts” – often very young people aligned with a VC fund and incentivized to identify early talent – are a kind of VC-aligned white-label of angel investors. See First Round Angel Track. Some VC funds are going further and creating their own accelerators. See Sequoia Arc.

My personal impression is that elite VC funds identifying and responding to competition from seed players, and themselves creating seed-stage arms of their funds, has been the nail in the coffin of the “golden era” of startup accelerators. It’s very true that some meaningful accelerators still exist, most notably Y Combinator, but it’s quite obvious now that accelerators no longer serve the central role in the seed ecosystem that they once did. It’s hard to imagine accelerators regaining their prominence among the very top tier of entrepreneurs without a significant revamp of their business models, including their pricing.

Ironically, elite startup accelerators once branded themselves as an alternative to a stodgy and antiquated university system, and yet now they themselves are seen, in some circles at least, as unnecessary and overpriced. The truth is accelerators are a service provider, with a relatively high price. It should surprise no one that the market responded by offering similar services (sorting, signals) at other price points. In the golden era of accelerators, a hustler would flaunt dropping out of Stanford or Harvard and joining YC or Techstars. I see a lot more elite founders today skipping accelerators entirely and just getting funded by a seed fund or nimble VC, accumulating a less centralized portfolio of signals, while saving significant dilution in the process.

This is not at all to suggest that the most elite startup accelerators are going away anytime soon. They absolutely have their place, particularly for founders in contexts where they struggle to acquire credible early signals; one key example being international founders in smaller markets. But all accelerators are facing credible competition and erosion of their pricing and brand power, as entrepreneurs at all levels, including those at the very top, realize that the value proposition of accelerators (signals for follow-on funding, a network, advisory) is often replicable at substantially lower levels of dilution.

At one level, the big picture story here is competition between different kinds of funders: angels, seed funds, accelerators, and VCs, all competing for each other’s turf, with different business models and price points. The number and variety of check writers grew significantly, changing power dynamics between founders and funders, and forcing the latter to become more flexible in order to access deal flow.

At a higher level, we see competition between signals. This post is ultimately about warm intros, which are one of many possible signals for the quality of a founder team. The “open application” style of accelerators and seed funds demonstrated that there were other ways to vet the quality of founder teams, and VCs eventually started integrating those other signals into their filtering repertoire.

We may be moving away from the warm intro as a central signal for startup quality, but we will never move away from the need for signals themselves. When people criticize the university system, they’re often criticizing its price, or its effectiveness, but they’re not criticizing the fundamental underlying “service” that elite universities and even standardized tests provide: talent sorting and signals. That service still needs to be provided somehow. The emerging theses are that there are ways of doing it better, cheaper, faster, etc. This is most definitely true, even if it’s also true that the older systems still have their place.

Developing alternative signals that produce results is legitimate improvement and market evolution. Competition between signals is not zero-sum. There’s room for more. But complaining about how existing signals are unfair or exclusionary without offering viable alternatives is (candidly) just whining. Not helpful. What we want to work and what actually works are two separate things.

Similarly, celebrating the weakening of the warm intro, much like celebrating the weakening of institutionalized education and testing, is not the same thing as pretending (delusionally) that we don’t still need effective + efficient talent sorting and signaling. Universities letting go of the SAT as a hard requirement does not mean some highly talented students won’t still use it as their preferred talent signal.

It’s the same with the warm intro. Sure we can talk about how it’s unfair and exclusionary, and that it’s a good thing that there’s a broader menu of signals available, but the fact is for many teams it still works. In fact, given how much bigger the market has become, with a larger diversity of credible intro sources (respected founders, senior executives, and angels being the best options), the warm intro today is arguably much less “chummy” than it was in the tighter, narrower networks of a decade ago. If you can get a strong warm intro (note: lawyers are not strong warm intros), I highly recommend you use it. In a crowded market, anything that can credibly differentiate you is worth using.

The wheat will somehow get separated from the chaff. That’s a fact. More ways of doing that (a wider variety of effective signals) is a good thing. But I would caution anyone from turning this story into some kind of “you can be whatever you want, if you try” warm-and-fuzzy narrative. Startup entrepreneurship is still brutally competitive and meritocratic (albeit imperfectly); exclusionary by design, just like any high-stakes industry or sport. Some barriers, like the warm intro requirement, have been loosened. But that’s meant the number of entrants has multiplied 10-fold.

The competition among funders has gotten much more intense, but so has the competition among entrepreneurs. The strongest teams will always use credible, unambiguous signals to differentiate themselves from weaker players in an increasingly crowded and noisy market. Some of those signals will be elitist, because the entire point is to identify the elite.

End-note: The topic of intros and signals often gets understandably lumped into discussions of “diversity” in the startup ecosystem. If you’re interested in my candid thoughts (as a latino from a low-income background) on that topic, see: Diversity in Startups: Whining, Warring, Winning.