The last thing the world needs is another startup accelerator, right? There’s Y Combinator and Techstars and … and … 500 Startups and … there must be others.
Ali Partovi, a veteran angel investor who became a full-time VC in 2018 with his firm Neo, thinks there’s still room for more. On Tuesday, he unveiled the Neo Accelerator, which will take just 20 teams at a time.
The notion of startup finishing schools probably peaked in 2014, if you take the milestone of coverage in The New Yorker as a trend’s apex.
- Y Combinator cohorts used to be tiny and incredibly selective. From 2005 to 2009, it admitted between 7 and 25 startup teams in twice-a-year “batches.”
- More recently, YC has become obsessed with the question of scaling, practicing what it preaches to the ventures it incubates. Its most recent batch had 377 companies. Remote collaboration, forced on Y Combinator by the pandemic, has made growing batches easier. “All of these accelerators have become a 100% Zoom experience,” Partovi said.
- Y Combinator has become a brand, and its imprimatur still matters. It made its name from the companies it backed in early batches, like Airbnb and Dropbox, but it’s still picking companies that matter, like Coinbase and OpenSea.
- But Y Combinator seems to be very much the exception. It’s had hosts of imitators and most have failed. Techstars has taken a different approach, seeding small accelerators around the country and across the world. Its latest, outside Knoxville, just opened. 500 Startups likewise has 11 global locations.
Neo is thinking small in the hopes of scoring big. The economics of venture capital are brutal: A very few superstars make up for the many failures. The point of an accelerator should be to increase the odds.
- Partovi, who has a good reputation as a startup picker — as an angel investor, he also backed Airbnb and Dropbox, as well as Facebook and Uber — is bringing back something of a velvet rope, aiming to recruit top technical graduates and alumni of successful startups.
- But selectivity doesn’t mean exclusivity. Diversity is incredibly important to Partovi, who’s Iranian-American. He picked “Neo” after the “Matrix” character: “a software engineer overcoming imposter syndrome with the help of a Black man and a woman.” His firm rethought the technical interview to make it more inclusive, and 49% of its capital has gone to firms led by women or underrepresented minority CEOs.
- The accelerator program includes a month of in-person collaboration at a resort outside Bend, Oregon, and a reunion week in San Diego.
- Where YC has set a template for most accelerators by ending in a Demo Day where startups pitch investors, Neo is holding a career fair instead. Partovi argues that hiring, not access to capital, is the real constraint for startups, and he’s trying to solve for that.
He’s also rethinking the financial mechanics of startup accelerators. Most accelerators provide funding and make their money, like VC funds, from selling their stakes in successful graduates.
- Y Combinator has changed its terms over time. The latest deal gives startups $125,000 in exchange for 7% of the company. Then they get another $375,000 in the form of a note convertible to equity. The terms are complex but they allow Y Combinator to maintain a meaningful ownership stake in the company over time.
- Neo’s terms are more generous to founders, Partovi said. It offers $125,000 for 2.5% of the company and a $500,000 note that also converts to equity — but for no more than 2.5% of the company.
- Why does that matter? Besides the more generous pricing, which implies the startups are more valuable, taking a smaller stake leaves more room for future investors. Getting the math right in what startups and VCs call the “cap table” — who owns how much — can be crucial to a startup’s long-term success. Screw up the cap table, and you may find yourself dining alone.
We won’t know for years if Partovi’s reboot of the accelerator model is a success. But it shows that there’s always room to tinker in the startup world. Founders constantly promise VCs that they’ll upend this or that industry. Why should the investing world be immune to change?