The Downside of "Demo Day"
jordancooper.wordpress.com
jordancooper.wordpress.com
investors walk around committing $100K checks to their “favorites.”
All that happens is they exchange contact info. The investor will want to meet (often multiple times) before writing the check, and the founders will meanwhile check up on the investor.
This too is completely false:
with the acceptance of outside capital they are making a 3-5 year life commitment
Neither founders nor investors believe there is any commitment to keep working on the startup any longer than the investors' money lasts. In fact, investors have even lower expectations than that. I've seen several startups blow up while they still had some investor money left, and they just returned what was left and there were no hard feelings.
And as for this piece of advice
If I were running an accelerator I would be brutally honest and advise the bottom 25-50% of their classes not to move forward with financing post-demo day
the problem is, we don't know that early who the big successes are going to be. E.g. Greplin now looks like one of the top startups in their batch, but after Demo Day they would probably have seemed in the bottom half. They were down to one founder, and a new idea he'd come up with 2 days before DDay which at that stage consisted of nothing more than mockups.
EDIT: You edited in a reply to that while I was commenting. I can agree you don't know who the winners are going to be, but more money = more commitment to an idea, so you'd think it still is an incentive for some to pursue something they shouldn't for longer than they should.
Looks like a good example of hindsight bias. If they have resources, and still think it's a good idea, why shouldn't they go for it? If they knew ahead of time that something else would be better, they would already be going for that instead.
Confirmation bias-
Let's say you are in an incubator working on idea that deep down you just feel iffy about. All of the sudden on demo day someone wants to give you 100s of k to take it further. Your mind will start to contort itself all kinds of ways to convince you that the idea is great and you should take the money.
Halo effect-
Needs no real explanation. Success of past classes/graduates is going to put the thumb on the scale when investors size you up, whether they admit it (which would be better for them) or not.
Combine the two and I think that more money is being transacted and more poor ideas being worked on than if you were to somehow explicitly control for both of these biases. Also, examples like Greplin may just be exceptions that prove the rule. I'd wager that it's pretty clear by demo day which ideas are top 10% ideas and which ones are bottom 10%. The middle might be fudge ground, but there are known winners and losers at that point.
re: 3-5 yr commitments: that's how long it takes to exit a company. As a founder, I view the acceptance of outside capital as a commitment to return their investment. emotionally, i think you are signing up for the long hall when you accept investment
re: Greplin, i agree, perfect example of someone who actually didn't try to raise a big seed round at demo day, but capitalized over time after demo day, once he was more sure of what he was doing...i think that's the model to follow, not just raise because it's demo day, right?
It was not a tactical choice by Greplin not to raise a large round after DDay. No one would give them one. But your advice for me was not to tell people only to raise small amounts. I often do that. You said I should tell people to quit, which would be a mistake, because I don't know yet which ones I should be telling to quit.
When motivation goes first, it's usually because the founders had a falling out.
My recent co-founders and I applied for YC this summer. While we did not make the initial cut, we did not move forward with applying to other incubators. The reasoning:
- YC provided experience not only from their own start-up success but also from an incubator (though they're really not an incubator) standpoint. Major reason to apply.
- None of the others we found provided something truly special.
Incubators need to find ways to differentiate. If they want to entice the best applications, it is important they offer something of interest outside of office space, some cash and a widely attended demo day.
I'm ready for another program worth applying to, and I do not want it to look anything like YC.
Seems to be 'grading on a curve' where it's not necessarily applicable. You could have a group where they're all great, and a group where they're all mediocre. Also, you could have different sorts of companies: some that are swinging for the fences and will either do something great, or fail, and others that aim for more modest growth.