Post Category → Advisors

“Top Startups” Lists and Accelerators

TL;DR: “Top Startup lists” are being used as complements, and in some cases replacements, to accelerators for helping entrepreneurs signal their talent to investors. Generally speaking, the “network effects” of accelerators are diminishing over time from the simple fact that they don’t really “own” their networks; making it harder for traditional accelerators to justify their cost as the “network” detaches from the gatekeeper. Long-term, many startup accelerators run a real risk of adverse/negative selection killing their core value proposition.

Background reading:

The value proposition of elite universities is a fairly straightforward 3-part bundle:

A. Education

B. Talent Sorting / Signaling

C. Network

Data showing that top students who attend elite universities perform on average the same as those who are similarly accepted but attend lower-ranked schools proves that the actual education elite universities provide isn’t nearly as important as some people think; at least for most students. But their talent signaling and network functions are fairly important and durable, and it’s very hard for competitors to build viable business models to deliver them; though some are succeeding.

Respected employers willing to not require elite educations are, for example, talent signaling competitors to elite universities. Being  “Google Alumni” can be seen as more value determinative than being “MIT Alumni.”

Now, the value proposition of top accelerators is also a fairly straightforward 3-part bundle:

A. Education

B. Talent Sorting / Signaling

C. Network

Look familiar? Many post-accelerator founders will tell you that the actual educational content accelerators provide is hardly that big of a deal to them. I’ve definitely known some entrepreneurs who find it useful, but the more hustler autodidact types will say it’s just re-hashed versions of what you can find online and in books. But the other two propositions (talent signaling and network) are harder to build.

To the extent accelerators build respected brands – and by that I mean respected by investors and other ecosystem players entrepreneurs want to connect with – their ability to sort through the ecosystem’s “noise” and signal talent, and therefore reduce search costs, is extremely important for founders. I would say most of the founders we work with understand instinctively that the main reason to attend any accelerator is to simply make it a lot easier to connect with investors. And yes, for the right accelerators, it works. Big time. 

Sidenote: Attending a B-class accelerator can be worse than attending none at all. If the A-accelerators reject you, you can just pretend to be one of the many companies that never even try to attend them; and just find other “signals” to use. But by attending a B-class accelerator, people now know you tried and were vetted, then rejected. Can be a scarlet letter.

Education? The best information is online and in books. Network? Not proprietary. Founders who can hustle know how to access all the same top people, many of whom want to ensure their own personal brands aren’t captive to an accelerator; ensuring significant “leakage” of the network. The networks of accelerators are compilations of the personal networks of individual people, and by bringing all of those people together for a period of time, without the leverage to lock them in, they’ve made it far easier for the network to be unbundled and re-bundled without the gatekeeping fee.

But it’s the reduction in search costs for connecting with investors (the talent sorting / signaling) that is the real money maker for accelerators. And yet talk privately with many investors, and they’ll tell you they resent the “hunger games” demo day and investor herding dynamics some accelerators produce, even if it’s the price for having someone else do a lot of the company filtering for you.

A short list of accelerators have built real and durable talent signaling brands, and are worth their cost tenfold; at least for now. The challenge for some has been maintaining them, and not supplementing themselves with business models misaligned with the goal of being very selective. Accelerators heavily tied to real estate/co-working, for example, are tempted to dilute the accelerator brand by accepting a lot more people, because they can still monetize them with offices (even if their equity isn’t worth anything). Lower your standards to fill office space, and your talent signal weakens, which means fewer top people show up to your events, which dilutes your network proposition, which further weakens the quality of your startups, and now you’re in a death spiral.

One thing you’re seeing all over the place in startup ecosystems today is “top startups lists.” “Top startups to watch.” Top this, top that. Top 50. Top 25. Top 10.

Initially, my reaction was to judge these lists as just PR plays. Politics/brand driven founders who want a bit of an ego stroke pander to publications to get on them, and in turn the publications get eyeballs and visibility, and can make money off of ads.

But analyze what these lists are, or could be, from the perspective of the talent sorting/signaling function of accelerators, particularly at early stage. To the extent some publications can build highly credible “top startup lists” – the kinds that investors and other players pay close attention to, they could prove to be viable (and far cheaper) competitors to the talent signaling proposition of accelerators.

I actually think many entrepreneurs understand this, and it’s why they care so much about getting on these lists, and why the lists are proliferating. If your ultimate goal is just to connect with investors, “top startup lists” that get real brand credibility could, much more cheaply, get you the “signal” you need to get meetings with selective investors.  Of course, it boils down to whether the right publications are willing to put in the time to build the needed credibility, and not make them simply politics or “pay to play” schemes. I suspect many won’t, but some will.

By no means am I under the delusion that accelerators and top startups lists are direct competitors; especially not at the highest tier. Many smart founders use them, wisely, as complements. The most important thing is for founders to understand what their real purposes are, and to judge them accordingly.  If many founders view accelerators as simply fast-tracks to getting the attention of investors (and they do), then you can fully expect there to be demand for cheaper alternatives, and players willing to experiment in delivering them.

The challenge long-term for many startup accelerators is going to be maintaining/justifying their value proposition, and therefore their cost. As alternatives to their educational and talent-sorting functions proliferate, and as their non-proprietary networks detach from the gatekeeping fee, many run the risk of adverse/negative selection. By that I mean that the top, most resourceful entrepreneurs will realize they don’t really need to pay the gatekeeper. At that point, the accelerator becomes a signal not of a top entrepreneur, but actually a less resourceful and more “needy” one. The emergence of leaner, lower cost accelerators in specific markets (asking for 1-2%, not 6-7%) is clear evidence of this. The price may just have to adjust.

Don’t be an Asshole.

TL;DR: You probably can’t afford to be one.

Background Reading:

A regular theme of SHL involves different ways for founders and executives to protect themselves from bad actors – often via advice that I’m able to give by being in a position of not representing any institutional investors, deliberately. If you want more on that, see: How to avoid “captive” company counsel. 

The purpose of this post is to flip the topic, and discuss why there are very real, non-warm-and-fuzzy, reasons why entrepreneurs/execs should be very careful not to behave like bad actors themselves.

If you apply Maslow’s Hierarchy of Needs to the business world, you arrive at one very real truth: the most talented, value-additive people in any industry are virtually never in it just for the money. They have enough, and trust their ability to earn more. Their talent allows them to care about other things: like challenging work, trust, friendship, impact, fun, respect, etc. By no means does this suggest they don’t care about money at all – in some cases money is a way for them to ensure they are being valued and respected for what they deliver. But it does mean that anyone who approaches these people with a kind of opportunistic cost-benefit analysis is likely to get ice cold water poured on them, very fast.

Startup ecosystems are full of these kinds of people. If all they cared about was money, they’d never touch early-stage.  If they’re working with startups (and your very early-stage risky startup), there are non-financial motivations higher on the hierarchy of needs at play, and you need to be mindful of that as you interact with them.

When you’re building your brand new or very early-stage company, unless you have a LinkedIn profile that screams “winner,” people all around you are going to be risking their time and money in working with you. There are 1,000 reasons why they might say no, and move on to someone else with a different risk profile. The absolute last thing you want to do is give them a reason to walk away, because they smell an asshole. And trust me, they will walk away. 

“Startup people” react much more viscerally to assholes than “corporate people” do, because the startup world often selects for people who won’t do or tolerate anything for a big payout. The large hierarchies of corporate environments enable, naturally, more hierarchical behavior among peers. In contrast, the “flatter” nature of startup ecosystems generates, and enforces, more “democratic” (respect everyone) norms.

As startup lawyers, we’re often in a position to see firsthand who the assholes in the entrepreneurial community are. They treat lawyers and many other service providers as line items to be deferred, discounted, and written-off to the very last dime, as much as possible; and will play games to manipulate people into giving them more for less. Thinking extremely myopically, these assholes think they’re doing what’s best for their company by grabbing as much as possible on the table – but played out over time, they’re actually whittling down the number of people who will work with them to those who simply don’t have other options. And when someone doesn’t have options, it’s often for a reason. Interestingly, assholes have a way of ending up stuck with other assholes. 

All of this applies just as well to top investors, particularly angel investors (with more freedom than VCs) who know they deliver a lot more than money. God help you if you give them even the slightest reason to think you’re an asshole. Information travels fast.

The definition of a mercenary is someone whose every decision is cost-benefit calculated for money. The fact is that if you build a reputation in a startup ecosystem for being a mercenary – always maximize the valuation, minimize the equity grant, discount the bill – you’re dramatically reducing your chances of making money, simply because of the personalities and values you tend to find in the startup world.

Be careful out there. Don’t be an asshole. On top of it being simply wrong, you probably can’t afford it.

How fake “Startup Lawyers” hurt entrepreneurs

TL;DR: Entrepreneurs need to be aware of the growing trend of lawyers from random backgrounds re-branding themselves as “startup lawyers,” despite having only the thinnest understanding of the subject.

Background reading:

There are two trends worth discussing in this post, both of which I’ve seen seriously hurt entrepreneurs and startups.

Thrown to the juniors.

First, one reason many entrepreneurs are dropping very large law firms for more “right sized” boutiques is that those law firms have become so unaffordable for almost any early-stage company that entrepreneurs end up working almost exclusively with very young, junior lawyers. I touched on this issue briefly in The Problem with Chasing Whales.  One partner in our firm worked on a seed financing in which his BigLaw counterparty literally said on their phone call “I only have 15 minutes to spend on this deal; otherwise I start having to write off time.”

The firm you engage may have a marquee brand, but if to that firm you are small potatoes, you will end up working with that firm’s B or C-team, which will put you much worse off than having hired a set of lawyers that take your company more seriously.

Junior professionals absolutely have a place in law, but that place is not working directly with CEOs on their most strategic decisions, no matter the size of the company. It’s working mostly in the background, with real senior level involvement and oversight. When an entrepreneur is thrown to junior lawyers, it reflects how the firm has prioritized (or not) that work, even if to the entrepreneur the project is extremely important.

Fake “startup lawyers.”

But the title of this post is really about a second, even more troubling, trend. I’ve been seeing an increasing number of litigators, real estate lawyers, patent lawyers, and lawyers with all kinds of backgrounds who have suddenly decided to brand themselves as “startup lawyers.” A little tweak to the website, read a few blog posts, perhaps host a free session at a co-working space or two, and voila, now they’re ready to help entrepreneurs.

Holy crap is this dangerous. Imagine if you were talking to a doctor about a potentially serious heart condition, inquired about their experience, and then got back the following response: “well, I’ve been a dermatologist for the past 5 years, but after reading a few blog posts I decided I’d try my hand at cardiology.” Walk out the door, fast.

In the “thrown to the juniors” case, at least those juniors have some accurate, up-to-date institutional infrastructure (templates, checklists, internal firm training, partner review, etc.) to rely on as they try to help startups. But these random re-branded lawyers are essentially training on early-stage companies, while relying on extremely generalized resources (like this blog) as guidance. We see mistakes everywhere, often because we get hired to clean up the mess.

In every serious law firm with a real reputation for representing emerging companies, lawyers who call themselves “startup lawyers” are corporate/securities specialists with a strong understanding of early-stage financing, tax, commercial, IP, M&A, and labor law as they typically relate to early-stage companies. They have the depth and breadth of expertise to properly serve as an early-stage company’s “outside general counsel,” of sorts, while relying on deeper subject matter specialists when needed. 

But a litigator or patent lawyer who read a few blog posts and stayed at a holiday inn express? Disaster. As I’ve written many times before, “startup law” is largely built on contracts, and the entire point of contracts is that they are permanent unless everyone involved agrees to “fix them.” There’s no “v1.1” update to fix bugs. That means the iterative, “move fast and break things” “we can fix it later” culture of software development is the last approach anyone in their right mind will apply to legal issues.

Stop treating entrepreneurs like suckers.

Ultimately, what these developments reflect is an underlying mindset among lawyers (and other market players) that “startup” is synonymous with “little shit companies.” First-time entrepreneurs may be very smart, but they don’t know what they don’t know, and they rely on their ecosystems and advisors for guidance in almost every area. It’s the same problem that leads them to get pushed to hire captive lawyers who really work for their investors, instead of hiring independent counsel that will actually do its job. 

Just throw a junior, or a random lawyer who managed to maneuver into a few referrals, to them; they’ll figure it out. They’re just a tiny company anyway. Whatever.

So my request to the broader ecosystem is: please, stop referring entrepreneurs to your random, local lawyer friend who decided to take a stab at this “startup law” thing. That’s not how this works, and you are hurting real people, building real companies with long futures built on the foundations put in place by these fake advisors.

And to entrepreneurs: be careful out there, and do your diligence. Many of us know that you wouldn’t quit your job for, or pour your life savings into, a “little shit company,” so align yourself with an inner circle of people who think accordingly.