Sunday, January 18, 2015

Why an Accelerator Can Save You

Chris Lynch, a partner at Atlas Venture, just wrote an article titled "Accelerators claim they are in it for the long haul — I call bullshit." Because he said a lot of true things about startups and venture capital, the article is rapidly making rounds in social media with "Amen! Someone needed to say that." However, despite the many truths, Chris reached a wrong conclusion and has dispensed some flawed and possibly damaging advice by calling most accelerators "wolf in sheep’s clothing.”

I don't run an accelerator. I am not an investor. But having been in startup mode for three years as co-founder of ZappyLab, I feel compelled to respond to Chris. Particularly, I want to focus on his statement "Entrepreneurship isn’t about raising money, it’s about building businesses and creating a return on investment."

The statement itself is 100% correct; it takes many years to build a successful company. But then Chris argues that because accelerator programs are only 3-4 months long, they can't help a startup in the long term, they can only focus on the pitch and raising money, and therefore are useless. What Chris forgets is that for first-time entrepreneurs, raising money is nearly impossible. And if you go bankrupt, no matter how great your idea, you won't have those years to build the company.

Startups fail for many reason. The biggest cause of failure is a bad idea, and the second-biggest is running out of cash. It may be hard for a partner at a big venture capital firm to appreciate just how difficult it is to get that cash because the partner's daily job is giving out the money. Luckily, as a founder, I have vivid memories of how close we came to bankruptcy, despite an amazing idea, team, execution and traction.

We came up with the idea of a GitHub/wikipedia-like site for science methods in January 2012. For a month, we tried to get someone else to build it or to figure out a way to do it on the side. By April, we knew we would have to do it ourselves as a serious startup. I approached several ex-bosses and asked them if they would want to be angel investors. We got a verbal "yes" and in May, my co-founder Alexei resigned as a CTO of another startup. Raising the seed round seemed hard, but in retrospect, I realize it wasn't too bad. Within a year, we got almost $500K of seed funding from wealthy individuals that somehow were connected to us. I didn't even quit my postdoc at MIT and thought that we would quickly build everything and I would manage to succeed at both the startup and my academic career.

But Chris is right, building a company takes a long time and is hard work. By spring of 2013, it became clear that we would need about a million to build and get traction. It became clear that I would have to leave academia and focus on ZappyLab full time. My family and I moved to Berkeley to join Alexei and to be in the right place for raising the capital. I was full of confidence, thinking:

We got half a million dollars just for the idea. It was a crazy risk for the angels as there was no product, no engineers, no anything except our desire to build this. How hard can it be now to get another million considering that I joined full time, we have assembled a great team, have built an amazing prototype that scientists love, got terrific traction and media/blog coverage?

How hard? Nearly impossible. That's because we had exhausted the angels that know us personally. The next round, you are talking to institutional investors and angels who don't know you. The bar to get funding is extraordinarily high. Don't be misled by the illusion that VCs are throwing money left and right for dumb ideas. Don't compare yourself to other startups that got funded with a worse idea, product, team, etc. You don't know why they got funded. Most of them have founders who had started companies previously, and that puts them in a completely different category. Don't forget that while Silicon Valley is full of cash, there are thousands of startups competing for it, and there isn't nearly enough cash to fund them all.

Throughout 2014, we burned through our savings, maxed out our credit cards, and ran a Kickstarter to stay alive. We had to build with virtually no resources. We had to get the users without any cash for marketing. We had to pull off miracles to survive. We did, and still, getting funding was hard.

Out of the 2.5 years of ZappyLab, it's now just the third month where we are well-funded and finally know that we won't evaporate in 6 months. Being accepted into Berkeley's Skydeck accelerator helped us a lot. Our idea has the potential to revolutionize science communication and save society billions of dollars. Vaccines, climate change, aging, cancer research - the work that impacts everyone and everything - will move significantly faster because of what we are doing. It is a great idea that might have failed had we not gotten into Berkeley's accelerator.

Yes, there are good and bad accelerators, just as there are good and bad investors in general. If you are accepted into one, take a look at Seed-DB and talk to founders that went through it. Figure out if the equity you give up is worth it. There are scams out there for sure, but they are easy to spot. There are mediocre accelerators and there are amazing ones. Do your due diligence and if it's a great accelerator, don't be greedy - the 6% you give up may make the difference between having those years to build a company or not.

Below are some more general thoughts on accelerators.
  • As mentioned above, accelerators are different. For example, Berkeley's Skydeck does not take equity, is 6 months, and provides an amazing office space, advice, connections.
  • In addition to mentoring and help with fundraising, a key value of being in an accelerator is having the other teams around you. The network of your cohort, the advice from other founders and the support will last long beyond the 4-6 months of the program.
  • Even a small investment of $50-100K from the accelerator can do wonders for your ability to raise angel and VC cash. Angel investors and some VCs often wait for a lead investor to give them confidence. The selection by and investment from a good accelerator can serve that "lead investor" role and facilitate your fundraising long before the Demo day.