Echelon 2014: What is wrong with angel investors and accelerators?
Dave McClure and Khailee Ng from 500 Startups share how angel investors and accelerators can better aid startups in their journeysBy Terence Ng 10 Jun, 2014
After Eren Bali’s speech about Udemy and what he has learned about building a marketplace, the second keynote of Echelon is fittingly about the reversal of perspectives: Instead of looking at the tech ecosystem through the eye of a startup, we now turn to an investor’s perspective, as Dave McClure and Khailee Ng from 500 Startups share how angel investors and accelerators can better help startups achieve milestones and funding.
Make a portfolio and differentiate yourself
On the angel investor side, what McClure and Ng found out from their experience with 500 startups was that it pays to have a portfolio approach. According to McClure, angel investing is inherently riskier than real estate, for instance, as real estate appreciates slowly but surely, while startups can either grow exponentially like Facebook, or most likely fail with no or even negative return on investment. A portfolio spreads risks and at the same time ensures investors reap the benefits of startup growth “unicorns”.
The next point, made by Ng, is that in his experience many angel investors tend to oversell their value-add, promising too much to startups then failing to deliver on those promises. This also, in his opinion, leads to them taking a predatory stance towards startups, taking too big of a stake and impeding those startups’ ability to raise funding later on. As an example, he found out that one angel investor took a nearly 85 per cent stake in a startup, which happened to be an Echelon alumnus, when he was interviewing the founder for a funding session.
McClure added that another thing that angel investors should take note of is the need for differentiation. Too many angel investors, according to him, try to do everything at once, and fail to consider their various strengths and weaknesses that they could leverage on to become more effective. Some areas that investors can focus on, said McClure, include expertise such as sales and marketing and industry verticals such as e-commerce or SaaS. He ended off the session by saying that angel investors need to be fast and not waste startups’ time, that a quick “no” is better than a slow “yes”.
Also Read: 5 things I wish I knew before 500 Startups
The best students are not necessarily the best founders
Continuing on to accelerators, McClure shared that the main aim of accelerators is to help startups get downstream funding, and that a good benchmark for accelerators is for a third of graduating startups to get funded within six months after leaving. He also noted that many accelerators, particularly those that are recently set up, have fixed and strict curricula that work well, but startups are all different and there’s no one size fits all – the most successful startups sometimes attend classes and sessions the least!
Ng agreed, adding that accelerators, rather than imparting information and skills university-like, should listen to founders and figure out the KPIs for the companies within the first two weeks. The aim is to encourage an inner compass within each company, teaching them to navigate the accelerator and come out with real takeaways and progress.
The environment that accelerators foster, according to McClure and Ng, also plays a large part in how successful an accelerator is. Rather than teaching them, accelerators should facilitate the environment for startups to discover solutions and to succeed. Ng mentioned an instance where he held a facilitative discussion with a startup’s founders, in which they expounded on their problems while he didn’t give any input, instead simply writing down the discussion on a whiteboard. At the end of the session the founders found their solution themselves just by looking at Ng’s notes.
McClure concluded stating the importance of location on accelerators. While it may be tempting to locate an accelerator in an inaccessible place due to cheap rents, he cautioned against such an approach as it reduces the chance of serendipity, where people in the ecosystem can meet other stakeholders, and where investors and founders alike can drop by anytime. One example, according to him, is our very own Blk 71, which acts as a meeting place for the startup ecosystem in Singapore and Asia.