Detroit Comes Alive–and Still Has A Way To Go

I spent last Thursday and Friday at TechWeek Detroit, which coincided with the first extended nice weather of the spring. It was a great event, bringing energy and vitality to a downtrodden city that is experiencing a rebirth. Detroit is on the way back, and in a big way. The scale of what is happening surprised me. Here are some impressions:

  • I stayed at the recently renovated Pontchartrain Hotel on the Detroit River, parked my car, and walked the city. You can’t really experience the life of a metropolis except on foot.
  • The hotel renovation was a success (with one exception): the lobby, restaurant, and rooms are modern and appealing; my room was large, well laid out and attractively furnished, with nice views in two directions of the river and Windsor, Ontario. The sound-proofing was a failure, though; a car waiting for one of the staff to get off shift, pounding hip-hop twelve stories below my room, disturbed my afternoon nap. This was a regular feature of my stay, pretty much around the clock.
  • The juxtaposition between what is good and new about Detroit, and what remains to be fixed, was a theme for the week.
  • From a passing car, downtown Detroit looks much the same as it has for years–rutted streets, empty storefronts, ruined buildings, with the fortress-like Renaissance Center looming overhead in rebuke. A disturbingly high number of scary-looking people stroll the streets. This is the Detroit the national media has covered.
  • At ground level, at a slower pace, signs of rebirth emerge. Walking past the old Federal Reserve Building, I’m suddenly in Campus Martius Park–and I’m in the middle of a big, thriving city. People spill out of the Quicken Loans Building, with its big glass front. The decision by Dan Gilbert to move the company downtown, seen as risky at the time, is now seen as visionary. Young tech workers, wearing headphones, dressed in “skinny casual” breeze by, walking in all directions. This generation doesn’t lift weights.
  • Each block has its own panhandler, each with a different approach. Aggressive; supplicating; faithful; silent; wheedling. These are the people who are being left behind by Detroit’s tech-enabled renaissance. Some of the passing young tech workers give the panhandlers money and some don’t. Nobody has a long-term solution for them.
  • The pace of development is so fast that fully leased, renovated offices stand beside gutted shells. They’ll probably be finished and rented next week. When Dan Gilbert speaks at TechWeek, he says that there is 95% occupancy in the 40-some buildings Rock Ventures has bought and refurbished. He also makes a point of talking about downtown security. He reads a report nightly, and there is much less crime than people think. Rock has its own security service, highly visible on Segways. He doesn’t say it, but the implication is that the decimated public safety department cannot be relied on. This is what it looks like when the private sector leads.
  • I arrive at the Hudson Cafe on Woodward, a breakfast place I found on-line. I have to pick my way over construction rubble, but it’s worth it. I instantly decide that it is a better breakfast place than anything in Cleveland, which the decor, food and coffee confirms.
  • I stop by The Madison Building 1555 Broadway Street, where I office when I’m in Detroit. It was the first building Rock Ventures bought and rehabbed–an old theater–and it is full of young tech companies from the Detroit Venture Partners portfolio. There is a good coffee shop on the ground floor, and a super rooftop party area.
  • Behind the Madison Building, on Woodward Avenue, is the office of Bizdom, the accelerator program that is part of the same family of Dan Gilbert companies. They’re full, too, in part from absorbing spillover companies from the Madison Building.
  • TechWeek is in the old Federal Reserve Building. There is a gutted area on the left where most of the action is, and an elegant marble lobby and elevator stack that is nicer than most offices I have worked in. Why did the Federal Reserve leave, anyway? How much did their new building–much further from downtown–cost taxpayers?
  • TechWeek is jam-packed–the exhibit space, the sessions, the corridors. Young tech workers mingle with a smaller group of older people who have weathered the storm and are smiling at Detroit’s rebirth. Others left, but they stuck it out.
  • Many of the young people I talk with or who are on the panels are Michigan returnees. They left after college to Chicago or New York or San Francisco. They were beckoned back by opportunity, by the desire to be part of something special, to be near family, and to raise their own families comfortably without having to be millionaires–though being tech entrepreneurs they all expect to be millionaires anyway.
  • There are some really good panels, but what everybody is waiting for is Dan Gilbert to speak. He begins at 2:30, some 1,500 people packed in to hear him. Dan has asked Greg Schwartz, founder and CEO of DVP portfolio company UpTo to join him on stage, but Greg doesn’t say much. “Nobody wants to hear me,” he tells me later, but Dan is subtly sharing the stage with a company he favors.
  • Dan talks about his vision for downtown Detroit. It’s staggering in scope, but I believe that it is going to happen. He says it will take some time to clear up the blight, but a lot has been done since the desolate night three years ago when I and some colleagues searched in vain among dark streets for an open restaurant at 7 pm.
  • The day ends with a reception on the rooftop of the Madison Building, a venue that holds a couple of hundred people. Congressman Gary Peters is a center of attention; a troupe of Venture for America summer fellows takes a picture with him. The sky is clear blue, with a few wisps of cottony clouds. It’s warm but with a breezy edge of cool. “San Diego weather,” somebody remarks. “Yeah, we have a hundred days a year of it,” somebody else says.

Something big is happening in Detroit. It’s not finished and it’s not perfect. There are bumps in the road–I suppose Rock Ventures will have to repave the city streets, too, given Detroit’s well-publicized fiscal problems. But it’s exciting and it is working.

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The Overuse of the “C” Title in Startups

I visited with an early stage company recently—or I should say they visited with me—and it had many of the features an early stage VC likes to see in an entrepreneurial team. Vision; energy; a variety of skills; belief; and passion. They had a completed first generation product and had engaged with customers early in the process to gain feedback to adjust the product and business model to solve real problems at a price that made sense. The accelerator that had helped them had served them well.

They were beginning to engage with VCs to explore next-round early stage venture capital financing. They had been coached to approach this correctly—they weren’t meeting with me to raise money, but to establish a relationship that could lead to a future funding decision. Since VCs fund only 1% of what they see, the odds are that a company which pushes a VC to make a funding decision too early will get a “No.” It’s hard to convert a “No” into a “Yes.”

The Company’s seed funding was also structured well. It was in the form of notes that would convert into the Series A venture round on the same terms as the VC investor in that round. I have written about this elsewhere, but seed notes that convert into a discount to the Series A price create undesirable misalignments of interest among investors. Anybody who wants a fuller explanation of this can follow this link:

It was a first meeting and it was a young team with holes in their experience. They had never raised VC before, but had a lot of ideas about what that entailed. They had never scaled a company; living through that process provides experience, at the visceral as well as intellectual level, that can’t be obtained in any other way.

And this is where we ran up against what I consider to be a real problem. There were five team members in the room, none over the age of 30. They had a variety of skills and experience—some more than others—but each had a title with a capital “C” in it. There was the CEO; the COO; the CMO; the CFO; and the CTO. They were the only five employees in the Company—I say employees, but they weren’t being paid much and were really in it for the equity and the experience.

I like to have a conversation early with a founding team, prior to investing, to gauge the self-awareness of each team member on this issue.

Companies go through distinct phases from formation to exit (or demise): start-up; early adoption; growth; maturity. Each phase requires different skills among the executives and managers, and many people in the founding team may not be able to (or want to) make the transition from one phase to another.

For instance, the person who is relentless at opening doors to gain early customers in the start-up phase may not be good at recruiting and managing a sales team in the growth phase. There is nothing wrong in this; it is normal across all functions of a company—sales, customer service, marketing, finance, development—for producers to either develop into managers or to remain producers.

An early executive who can’t make the transition to the next phase may be a valuable employee, but if he or she has a title with a “C” in it the only way the employee can be retained is with a demotion. Entrepreneurs often take their identity from their role in the company and it’s a real blow to their sense of self to take a demotion. It’s challenging to remain a happy, loyal and dedicated employee after a demotion and difficult for other people in the company to know how to maintain or alter relationships with the demoted person. Sometimes a demotion works, but more often it doesn’t.

My solution to this dilemma is easy: don’t hand out too many “C” titles early in a company’s development. This retains an upward pathway for people who perform. People whom the company outgrows but remain valuable individual contributors don’t have to be demoted to be retained. The founding team should be motivated by equity, anyway, not the pomp and perquisites of management.

This particular team hadn’t been well coached on this issue. They seemed offended when I brought it up. I was glad to know this early on, because if this is going to be an issue, it should be surfaced before an investment is made. I told them that getting a VC to invest in a company with five people, all with “C” in their titles, will be an obstacle. I’ll be interested to see if they come back again, and what they have to say about this subject when they do.

Crowdfunding, Marketing, Big Data and The Death of Direct Sales

I was sitting in Demo Day the other day at FlashStarts watching ten companies present. The event had been scheduled to coincide with the first day of Title II of the new JOBS Act, which allows companies to directly solicit investment over the Internet or through other methods of mass marketing. This overturns 80 years of regulation which prohibited mass solicitation of investors by companies raising early stage venture capital. The first presenting company, Crowdentials, helps companies comply with the new SEC rules, which still require that companies ensure that their investors are “accredited” or face the penalty of not being able to raise additional funding for one year (a death knell for start-ups).

It suddenly occurred to me that I was seeing another manifestation of a question that has been troubling me: what does the massive movement of commerce on-line mean for expensive direct sales by enterprise software companies? Multiple companies in which I have invested early stage venture capital have been wrestling with this question.

What fund-raising and enterprise software sales have in common, I realized, is that they have traditionally been direct selling activities—in one case because of rules, and in the other because of the complexity of selling software to enterprises. If a company wanted to raise money, it had to interact with people it knew or to whom it was directly referred and who also passed the test of being accredited investors.

Similarly, enterprise software selling was traditionally dependent on personal relationships between a salesperson and customer personnel. The best salespeople moved from company to company, and sold different products to the same customers over the years.

Direct fund-raising and direct sales are now both being eroded by the massive movement of people online. Our on-line lives enable us to affiliate with people and companies that share our interests, irrespective of where we live or who we know in our daily lives. We can see them, trace their social networks, and readily find ratings about them. We are entering the era when marketing will replace direct sales in most situations.

Why is this happening?

Direct selling (or direct fund-raising) is expensive, labor intensive, and doesn’t scale. It is time consuming, results are hard to predict, and customer decision processes are opaque. Growing a direct sales force requires a significant investment; half of the salespeople a company hires don’t work out, but it’s hard to predict which ones until the company has made a significant investment. Many fund-raising processes, similarly, end in frustration. Having financed multiple companies that rely on direct selling, I can tell you that it is frustrating for boards to receive sales forecasts and the explanations associated with them.

What is enabling the shift from direct selling to marketing?

The simple answer is the Internet, but there are several components to consider.

  • Privacy is dead, but transparency is increasing.

Far from enabling companies raising money or selling software to be anonymous, the Internet actually increases transparency, enabling investors or customers to evaluate them and the reputations of the people behind them, before ever engaging with them.

One company in which I invested has depended on direct selling and has had frustratingly long sales cycles and convoluted sales processes. Last year, a well-known technology company called, said that they had completed an analysis of available products, and had chosen this company. They were ready to buy, and the sale was completed very quickly. They had never engaged with anybody at the company!

Last month a company I know received an unsolicited term sheet from a New York investment group at a breathtakingly high valuation. Nobody at the company had ever engaged with the investment group! We have speculated that they had an investment thesis around the company’s products, monitored social media, and picked the company with the highest profile as an investment target.

A third company finds that its yield in direct selling has reached historic lows. People aren’t responding to e-mails or answering the phone. The first time the company often hears about the prospect is when an RFP is issued.

What happened?

  • Buying is replacing selling.

In all three cases, enough information was available about each company on the Internet to enable analysts, who knew nobody at either company, to conduct a thorough assessment without ever engaging with the company. Social media rankings and quality ratings were certainly a part of the analysis. This is a recent phenomenon, probably just emerging over the last year, and still in its infancy. The ability to do this type of analysis is one benefit of big data and the tools that turn it into useful information. (As I was writing this post, an article in the Wall Street Journal confirmed my suspicions about what is happening: If You Look Good On Twitter, VCs May Take Notice.)

Investments used to be made, and software used to be bought, based on the trust developed in personal relationships between individuals. There is now so much information available on the Internet about us all (yes, privacy is dead) that investors can learn about companies, and companies can learn about software, without direct sales presentations.

  • Geography is becoming less important.

Formerly, companies raised investment in their communities, where they were known, and enterprise software was sold by salespeople who spent their careers developing relationships with particular companies in the territory in which they lived. Where you live and where a company is based are becoming unimportant in investment and sales decisions.

  • The Internet is becoming a video medium

One reason that geography is unimportant is that the Internet is creating platforms on which people can interact based on interests and preferences and video enables face-to-face interaction.

  • Investors and customers are overwhelmed by information.

VCs and angels have an excess of deal flow, and company personnel who have a role in buying software receive hundreds of emails and dozens of phone calls each week. (I receive multiple phone calls and dozens of e-mails per week trying to sell me cloud-based software, IT outsourcing services, or something similar and I don’t buy any of these items, causing me to question whether these companies direct selling efforts are effective.) It’s impossible to even read all the material, much less make sense of it. Deal flow has always been filtered through trusted referral sources, but now it’s also being filtered by accelerators.  Similarly, the software sales dynamic is shifting from responding to sales solicitations to reaching out to solve a problem.

  • Corporate security is enhanced due to 9/11.

Everywhere I go now, you need a badge to get into buildings, or to be escorted by somebody with privileges. One software company CEO who came up through the sales ranks, says, “I used to be able to get into every building on the Ford campus, except the R&D center, and wander around seeing people. I can’t even get on the campus now.” The way in today is through cyberspace.

I think what we’re witnessing is the death of direct sales (in most circumstances) and its replacement by sophisticated marketing tools.

What should companies that are raising funds or selling products do? Clearly, marketing is becoming more important. The ability to project a brand onto the Internet and to be distinguished from the clutter will be important to both fund-raising and selling. Here are some recommendations for any company raising money or selling a product or service:

  1. Make sure your product or service (if you’re raising money, it’s the entire company) is solid and will withstand Internet and on premises due diligence. This means going beyond the traditional methodologies and incorporating social media monitoring software, such as Radian6, to evaluate your on-line presence.
  2. Be very careful before investing in or expanding a direct selling operation. Make sure you have a repeatable, cost-effective model before embarking on a hiring spree.
  3. Be expansive in hiring leading edge marketing talent. Invest in the people and tools to create marketing or fund-raising campaigns that break through the clutter.

Will direct sales survive the Internet? Probably, in some places and at some level. Complex enterprise sales will likely always require hand-holding on the customer side. Parts of the international market are slower to catch on to trends discussed here than U.S. companies and, for cultural reasons, will be slower to abandon personal direct selling. Eventually, though, the cost of direct selling will be too high compared with the cost of effective marketing and direct selling will become a niche approach to reaching customers.

Wealth Creation is A Precondition of Job Creation

I was pleased the other day, while attending Demo Day at FlashStarts, to hear founder Charles Stack state that the goal of the accelerator and each of its companies was “wealth creation.” That was the only goal he discussed, and he pointedly mentioned it several times.

For the last decade I have participated in and supported many initiatives to remake the economies of Ohio and Michigan into entrepreneurial ecosystems, including engaging in early stage venture capital investing. Many people from the private, public, and non-profit sectors were involved in creating many programs and activities, including:

  • Technology investments from Ohio’s Third Frontier program
  • Funds-of-funds such as the Venture Michigan Fund, the Ohio Capital Fund, Renaissance, Cintrifuse, and the 21st Century Jobs Fund
  • Incubators, accelerators, and entrepreneurial assistance organizations like BioEnterprise, Ann Arbor Spark, JumpStart, and NextEnergy
  • Enhanced technology transfer at the region’s universities
  • Formation and support for pre-seed and seed funds
  • Loan and equity investment programs directly from Jobs Ohio the Michigan Economic Development Corporation, and Cuyahoga County…
  • …and many more.

Most of these activities have been supported by non-profit foundations and by taxpayer funded programs administered by government. Never once have I heard a public official or a representative of a non-profit organization state that “wealth creation” was one of their goals (although I was pleased to see Cleveland’s foundation community well represented in the Demo Day audience). And therein lies a fundamental difference between the objectives of the private sector and the public and non-profit sectors.

For politicians and people in the non-profit sector, the overriding interest is “jobs.” “Jobs” is the goal discussed in every speech and news release and the central variable measured in progress reports. It is the obsession of the media and of critics of the above programs.

What I have never understood is how jobs are supposed to be created without wealth also being created. I understand that government spending can temporarily create some types of jobs and that many people want to believe that having government create jobs and give them to people is the way to alleviate unemployment and create economic growth. All of the research, however, shows that this approach doesn’t work: these jobs cost more than they repay, and they require ongoing subsidies.

We have just gone through a cycle in which government spent huge sums of money to move the unemployment needle, without much success. It is true that some individuals and companies can do well by feeding off of government spending, but it is an illusion to believe that jobs created by crony capitalism are self-sustaining. Money must be taken from productive sources to continue subsidizing them.

Unfortunately, there is a divide in American society: in the public sector, media and non-profit worlds, the words “profit” and “wealth” often carry negative moral connotations. The pursuit of these objectives is deemed to be “greedy” or exploitative. That’s one reason that the public sector tries to create jobs without creating wealth.

In the private sector, businesses and business people understand that profit and wealth creation are the measures by which they can determine that they are serving customers and creating sustainable companies and employment. Yet, the business community has been  put on the defensive by a public and media assault on profit and wealth.

Over the last decade, I have spoken often about the need to publicly support wealth creation. I haven’t had much support on this subject; maybe I have been traveling in the wrong circles. It’s good to have Charles speak up, and he is doing so with his own money and investor money.

Wealth creation must be the goal in entrepreneurial ecosystems. When wealth is created, so are jobs. Wealth is what will feed government coffers and the endowments of foundations. It is a virtuous cycle when it is working properly. Except in pockets of our economy, as Richard Florida points out in The Atlantic Monthly, we are not creating enough wealth.

It’s time to fight back and speak the truth: If America wants to create economic growth and new jobs we must embrace profit and wealth. There is no other way to get out of the economic doldrums.

Why I Like Mid-Career Entrepreneurs

Earlier this year I was asked to participate in a business plan competition at one of Cleveland’s elite private schools. The format was a “Shark Tank” and, like the television show of that name, the idea was that a group of investors would bid on which student companies they wanted to back. After a little competition between the investing teams and back-and-forth with the entrepreneurial teams, the general idea was that all money would be invested and all companies funded.

I was one of the investors but since there are only a few early stage venture capital investors resident in Cleveland, the investing teams were rounded out by people from accelerators, small businesses, and non-profit organizations. I was teamed with three people I didn’t know, none of whose retirement income was dependent on the quality of investment decisions they made. Each of the four investing teams was given a fictional $1,000,000 to invest in the seven presenting companies, each with up to five team members.

I was impressed that a high school was teaching entrepreneurship and that so many bright students would take the time to develop and pitch a business plan. Schools have over-emphasized preparation for academic colleges in the last 30 years, but many people aren’t suited to that type of education—and we’re seeing that there are fewer suitable jobs on the other side of an academic degree than there are people receiving such degrees.

Many successful entrepreneurs never went to college or, like Bill Gates and Mark Zuckerberg, never completed college once enrolling and comparing college with entrepreneurship. I noticed when getting my MBA at the University of Michigan that most of what the professors taught us was based on field work observing successful businesspeople, many of whom didn’t have MBAs. That observation was one my own forks-in-the-road in pursuing an entrepreneurial career over the false security of big company employment. On graduation, I picked up and moved to Silicon Valley with no job.

The student presentations were generally good, though necessarily immature. Most of them were “me too” ideas that were based on needs that teens could see in their lives, but which could be easily conceptualized and duplicated by other people. Most had flaws in their analysis of market, distribution, sales process, IP, or capital requirements. That was to be expected; the students had been given only a semester to take an idea and develop it, had no entrepreneurial experience, and had other academic and extracurricular commitments. The students were smart and hard-working and the teams had been well balanced in gender and ethnicity. They had been coached to give each student a speaking part in the presentation.

There was one exception to all the rules, a business that two introverted nerdy male students were already running—a videogame company with a product and customers.

After each of the teams pitched, the four investor groups were sent off to confer and prepare their bids. I immediately disconcerted my teams members by stating that I was only interested in investing in one of the seven companies—the one with a finished product and customers. This seemed to violate the intent of the event—as some people saw it—to get all the companies funded and to have a “feel good” outcome for everybody who competed. Some of my team members wanted to discuss, score, and rank each company, and I went along with the exercise.

Time was short, though, so we were called to begin making offers to companies. I made a beeline for the gaming company, but another investor group had gotten there first. Another presenting company stopped us and, in the interest of playing the game, we engaged with them.

They thought that their business idea was worth $400,000, and that we should invest $100,000 for 20% of the company. It had been one of the better ideas, but would have required a lot of work, a number of experiments to test assumptions, and a pivot or two. I decided to throw them a curve.

“Okay,” I said. “I get that you believe in this idea and in your ability to pull it off. You’re committed. So how about if we give you the $100,000, but we own the company and you earn your equity stake, over time, by achieving milestones.” A moment of stunned silence followed—this was clearly not what they expected. The rules were that investors were supposed to offer an amount of money for a percentage of the company, followed by a negotiation and a deal.

When evaluating a company I always—always—challenge one of the team’s assumptions to see how they will react. I’m observing the human behavior associated with responding to the unexpected, because this tells me something about how the team will respond to the inevitable twists and turns of pursuing an entrepreneurial endeavor. This is a deliberate, considered, and intentional part of my due diligence process. In some quarters this has branded me with being aggressive or arrogant with entrepreneurs. Nevertheless, I consider this to be a necessary step in being a good steward of the capital that my own investors have entrusted to my care. After all, an investment in a company is an investment in the people running it.

The team members looked at each other for a minute. I saw one or two nods, some averted glances, and some shuffling of feet. They weren’t prepared to respond to my question. Then one of the team members spoke up and, in a voice only a teenage girl could use to dismiss the obviously ridiculous, said, “No, it’s our idea. You have to buy into our company.” She wasn’t looking at me when she said this, or at her team members. Her lips were pursed and her body language betokened impatience. I now knew how this team functioned. There was a nervous flutter as her team members contemplated the aggressiveness of her response, and then one of the coaches called “time” and we switched off to another company.

Our culture and media extol youth, particularly in entrepreneurship. Though I appreciate and enjoy the young (including my two wonderful kids) I find myself gravitating towards mid-career entrepreneurs in my investment decisions—after experience with both young entrepreneurs and mid-career ones. Why is that, I have asked myself?

There has been a flurry of research recently on the concept of “10,000 Hours:” that it takes ten thousand hours of practice to become good at something. I believe this. Fifteen years ago I joined my church choir, after being a secret car singer. I didn’t read music (which I didn’t admit) and had never sung publicly or in an organized group. It took me about five years to learn how to fully read a piece of music. Only after eight years did I have a sense of what it meant to create beautiful sounds—how to use the diaphragm, throat, tongue, and lips to control exhaled air, when to go loud and soft, whether the piece was written to sound like brass or woodwind.

I had a similar experience developing competence in venture capital investing, in working with my son to become a second degree black belt in Tae Kwon Do, and in working with my daughter to learn how to figure skate (yes, I took up both sports in mid-life). Results don’t just show up immediately, or because you want them to, or because you’re smart or deserving or talented. You have to put in the time to develop competence, to make and learn from mistakes (in Tae Kwon Do that looks like being kicked by a large teenager; in figure skating, like falling hard on the ice), and to learn what it means to persevere.

I like mid-career entrepreneurs because they have invested their 10,000 hours in learning how to be businesspeople. By the time they come to me, most have experienced enough of the ups-and-downs of life to be ready to focus on those things that are necessary to achieve success, and to put aside those things that are unimportant.

Our society needs an entrepreneurial economy. That’s where the job creation and wealth creation occur that enable us to finance everything else we want to do as a country. But venture capital, as a product, is too precious to be deployed teaching people–like the young woman who dismissed my idea out of hand—how to be entrepreneurs. I did this once—I called it buying an MBA for the entrepreneur—and it wasn’t a successful investment. I will only invest in young, first-time entrepreneurs again under defined circumstances.

Where are young people going to get capital for their enterprises, then? The good news if you are a young entrepreneur is that there are more resources than ever to help you: entrepreneurial programs in high schools and colleges; accelerators; angel investors; seed funds. Plus, the Internet and new technologies have made it possible to start a company, especially a technology company, with less capital than ever before.

By all means, please send me your decks and reach out to me for feedback and to develop a relationship. Don’t pitch me, though. I’ll see you at the accelerators where I volunteer my time. Remember,  venture capital invests only in one out of a hundred ideas that it sees. Your odds are not good—unless you have put in your 10,000 hours.

Oh, and by the way, we didn’t get the investment in the gaming company. Another team, led by a young employee of one of the local accelerators, gave them a higher offer. We would have raised our offer to match or beat that deal, but it didn’t occur to the young entrepreneurial team that they could come back to us to negotiate a higher offer. They thought they had only one bite at the apple. Ah, experience. The young accelerator employee, by the way, invested all of his money; we invested none of ours (to the disappointment, I think, of some of my teammates). That is one difference between the accelerator model and VC investing.

New Style Accelerators: Fad or Fixture?

I spent a couple of hours today at FlashStarts, one of the new style accelerators for technology companies to raise early stage venture capital. They had asked a couple of VCs to come and hear company presentations—not pitches—and give some feedback. The presentations, as should be expected early in the process, had strengths and weaknesses. Driving home led me to musing about whether these new style accelerators are destined to be a fad or a permanent fixture in the start-up scene.

Accelerators like FlashStarts are popping up across the country, including in places not traditionally known for entrepreneurship—at least on the scale of Silicon Valley: Launchhouse; 10xelerator; The Brandery; 1871; Healthbox. Why is this?

Successful innovations are copied in an economy, like a successful mutation that sweeps through a population. Early versions of accelerators, such as Y Combinator and TechStars, have spawned imitators because they generated some great companies in a model for investors that seemingly reduced risk, lowered start-up costs, and brought together potential deal syndicates.

Will the followers be as successful as the innovators? It’s probably too early to tell. Does a mutation become a permanent fixture in the gene pool, like the ability to digest milk into adulthood, or fade away like some mutation none of us has ever heard of? Or will accelerators, like mortgage-backed securities (initially a valuable financial innovation) be adopted too widely and become a money-losing debacle?

There is a lot to like about the approach to accelerating start-ups. Entrepreneurs are encouraged to quickly (and inexpensively) build a minimally viable product (MVP) and get it out to customers for fast feedback and iterative enhancements. They receive mentoring from experienced, successful entrepreneurs like Charles Stack (the founder of FlashStarts) and experienced VCs like myself and Mike Stubler. They hang out in a cool space where they can share ideas and receive peer support from other entrepreneurs who are tackling similar challenges. Investors can come and interact with entrepreneurs without the pressure of having to “take a pitch” and make a Yes/No investment decision.

The main concern I have heard expressed about the proliferation of accelerators is whether deal quality will be diluted. Some companies serially apply to every accelerator program in the country until one accepts them. The process for each accelerator is supposed to be selective, but if there are many accelerators seeking deal flow, does this dilute overall quality? For the newer ones, that haven’t yet developed a track record and name brand, the answer is probably “yes,” at least in the short term. Established accelerators like Y Combinator and TechStars will probably continue to attract quality companies. Programs which aren’t able to demonstrate success will either adjust their models or go away. That’s how evolution works.

On balance, I think that these new style accelerators are positive and will become a permanent fixture of the entrepreneurial economy that the U.S. so desperately needs to drive economic growth and wealth creation. I’m spending more and more time with these programs, and I’m probably learning as much as I’m contributing. That’s evolution, too.