Accelerate to Success: Decoding Startup Accelerators with Michael Cardamone from Forum Ventures

[00:00:00] Michael: The age old debate that you see on Twitter everywhere of whether, whether you should invest in YC companies or not. The bigger problem is just like where they're getting priced relative to the venture model and venture math for a fund. It's more around going through the accelerator to optimize setting the business up for success and optimize the probability of raising around.

[00:00:20] Michael: You need to make sure you actually. Need what an accelerator provides in order to justify giving up the amount of equity accelerators. I think a founder needs to be open to feedback, open to change, open to being coached a bit. We look for is founder market fit. Like, do they have some unique experience or insight that gives them an advantage?

[00:00:42] Michael: Can they very clearly and concisely communicate how their market's evolving and like how they fit into that market and. How they can win in that market. You need to be providing an amazing founder experience where founders time and time again, we'll say, I'm glad I did that.

[00:00:57][00:01:00]

[00:01:00] Rahul: Welcome back to Understanding VC. I'm your host Rahul. Understanding VC is a perpetual MBA on a single subject, venture capital. Today, I'll be having an in depth discussion on accelerators and why founders should consider joining one with Michael Cardamone. Michael is a CEO and managing partner at Forum Ventures, an early stage fund, startup accelerator, and community for B2B SaaS tech startups.

[00:01:22] Rahul: And prior to Forum Ventures, Michael was one of the first 30 employees at Box in a BD role, and then led partnerships at Academics Direct. Now let's

[00:01:31] Rahul: Hi, Michael. thank you so much for joining me today.

[00:01:34] Michael: thanks for having me. I appreciate it.

[00:01:36] Rahul: Yeah. A couple of months ago, I was listening to a YouTube video where Sam Lesson, he talks about why he does not like to invest in YC startups. Uh, his argument is that, you know, most of the YC startups or in fact, all of them are coached, to present themselves as great businesses. So then, you can't really differentiate which is the real.

[00:01:57] Rahul: good ones and also the, [00:02:00] you have to pay a higher price for the access. So

[00:02:03] Michael: Yeah,

[00:02:03] Rahul: is that a fair

[00:02:05] Michael: yeah. The age old debate that you see on Twitter everywhere of whether whether you should invest in YC companies or not. yeah, I mean look, like, part of an accelerator's job is to help prepare them for fundraising and YC does it. That may be better than anyone else, at, at kind of getting people hooked and they have the, the kind of halo effect around their brand.

[00:02:29] Michael: Cause they've built such a strong brand and that inherently drives prices up. I think the bigger problem is not necessarily that they're all good at pitching, like I think an investor's job is to kind of. Figure out if there's real substance there and whether it's a market they like, and they like the founder.

[00:02:46] Michael: I think the bigger problem is just like where they're getting priced relative to the venture model and venture math for a fund. and I think that's the bigger gripe that you see from a lot of investors where they, you know, I think [00:03:00] some investors are happy to invest in YC companies and have probably done very, very well because YC has had, you know, tons of huge successes and.

[00:03:10] Michael: you know, I have angel invested in a couple of YC companies that have gotten really big. But, but I think you get a lot of people who are the price that they're raising at in this market just don't fit what the portfolio construction model they have in mind, for the math they're trying to do for their LPs and to return the fund.

[00:03:28] Michael: And so they avoid it. And I think both are okay. I don't know that there's a right answer. but, but certainly we see both sides of the debate, but I tend to disagree around the problem is that they're all good at being coached. I think the challenge for some investors is more around the price that they tend to raise it.

[00:03:48] Michael: Yeah. Yeah. But it's also true that, you know, it's impossible to have so many large outcomes, right. In terms of like so many large, businesses being built. So, [00:04:00] Yeah, I mean, I look like we, we tend to be more price sensitive out of our funds. you know, we can talk a little bit more about our model, cause we have three different funds and strategies, but, and so we don't tend to invest at, we, we think it's like hard to return a seed fund when you're investing at 20 to 30 million valuations at seed round.

[00:04:20] Michael: I just think it's, it's really hard to make that work. If you're a multi stage fund. And you can deploy large amounts of capital at the next round to, to, you know, increase your ownership and it ends up being a big success. Then like, maybe you can make it work, but I think it's harder for us, you know, pre seed or seed fund to make it work when you're investing at 20 to 30 million valuation.

[00:04:42] Rahul: Yeah. So if it kind of, uh, disincentivizes pre seed and seed stage VCs, then, as a startup, should you really join an accelerator, especially in 2023?

[00:04:55] Michael: Well, so I, I would say YC kind of is a bit [00:05:00] unique in that they are. By far the most successful have by far the biggest brand and, and therefore the most, the most like kind of halo effect around the companies that, that they're in. And because of that, they get a price bump on valuations and they get, you know, more competition, of investors fighting to get into those rounds, which drives the price up.

[00:05:26] Michael: And so I don't, I think that's like somewhat unique to YC. I tend to think. Our accelerator. And most other accelerators, if not all other accelerators, companies on average kind of come out raising at generally like kind of market valuations. and it's less about, Going through the accelerator to optimize, the valuation on the next round.

[00:05:50] Michael: It's more around going through the accelerator to optimize setting the business up for success and optimize the probability of raising a round which for a [00:06:00] first time founder in, in this market is increasingly difficult. and so I think, you know, there's a lot of reasons to go through an accelerator, but I think the, the 20 million plus valuations is pretty unique to YC.

[00:06:14] Rahul: Yeah. So, so in terms of why a startup should go through an accelerator, you would argue that one is it helps you with the next round of fundraising, besides that it sets your business, up, to be successful. You are more likely to succeed in what specific

[00:06:34] Michael: I would say there's a number of reasons. so if you're a founder and oftentimes the founders going into accelerators are either people who have like had a successful career outside of tech and now they're building a software tech company for an industry they spent a lot of time and have a lot of domain expertise in, but it's their first time as a tech.

[00:06:54] Michael: Founder, or maybe they've built a service business and now they're building a software business for the first time, [00:07:00] or they're a first time founder and they're earlier in their career and they haven't built a huge network. Haven't gone through fundraising, haven't kind of gone from zero to one. And so I, you know, I think the founders who tend to join accelerators, part of what they're looking for, I would say a few things.

[00:07:15] Michael: One is obviously help with fundraising. You know, most founders who come into an accelerator, their goal is to raise around afterwards and it's a big, a big part of it is like helping them prep for that, which is a mix of like helping them think through the narrative and the deck and you know, what, what needs to be true in order to increase your chances of raising, but then also getting them.

[00:07:36] Michael: In front of and getting them meetings with a bunch of investors who are a, the right stage fit and the right type of thesis fit for their company. so, so that's one two is tactical support. We do that. And a lot of accelerators do that in a couple of ways. One is we have programming, but instead of like high level generic programming, we try to tailor the programming to the company as we make it very specific, very tactical, a lot of [00:08:00] workshops.

[00:08:01] Michael: a lot of hands on stuff. so that might be, you know, it might be like things like demand gen or like how do you leverage content marketing to build SEO or how to run an inside sales process when you're like founder led sales or maybe one SDR. Like it's, it's a lot of things that are like very tactical.

[00:08:18] Michael: It might be like, Hey, record your sales calls and we'll listen to them and give feedback. how do we help you build a lead list? How do we make sure you're targeting the right ICP and going after the right customers and his messaging, right? And how do you tweak that and iterate quickly? And all of those sorts of things is, is stuff that we do through both programming and a lot of one to one support with both mentors and our MDs, uh, I would say another is, is just like accountability, you know, part of a founder, like if you're just building in a vacuum.

[00:08:48] Michael: it's harder to like really hold yourself accountable for, okay, like here's where I want to be in six months. Like what are KPIs I should be tracking on a weekly basis to see how I'm tracking against that. And am I focusing on the right [00:09:00] things? Am I, it's like, if you're in the weeds, sometimes it's hard to like pick your head up and really see, okay.

[00:09:04] Michael: And maybe I'm like running in the wrong direction with my head down. And like, maybe I need to like really think about whether I'm even going after the right customer or have the right messaging or have the right product. So some of it is just like having peers and. And people who work at the accelerator to hold you accountable.

[00:09:21] Michael: And then the other is, is just like, look, being, being a founder is hard. It's like really lonely. It can be like an emotional rollercoaster. It can be mentally challenging. Like, you know, you probably have family members telling you like, what are you doing? Like, why don't you get a job? Like you, you have a lot of like pressures and a lot of different directions.

[00:09:39] Michael: And then when you hire people, you have the pressure of like making payroll and being responsible for someone else's. salary and benefits and, and so I think being like surrounding yourself with whether it's an accelerator or something else, surrounding yourself with other founders, both at a similar stage and the stage just further than you, I [00:10:00] think is like incredibly helpful for founders tactically, but also just from like a mental health standpoint.

[00:10:07] Michael: Oh, you're going through that too. Like other people are going through it. Like let's lean on each other. Let's like. Not just share the, all the good things that are happening, but like, what's the, like, really hard stuff that's happening and like, how do you, how are you navigating it? And, I think that's like, you know, Accelerators are uniquely set up to do that because we inherently have a big community because we invest in a high volume of founders and, and you come in and like cohorts with other founders at your stage.

[00:10:33] Michael: And we have founders that have gone through the program that are at later stages, but whether it's an Accelerator or not, I tend to think founders. Should find a group, a peer group that they can like, be a part of and connect with fairly frequently. 'cause I just think it's so helpful, on the founder journey.

[00:10:50] Michael: But, so those are a bunch of reasons why, why I think founders tend to join accelerators and where I think it can be helpful. And then, you know, you know, we can talk more about like which [00:11:00] one is the right fit for you. But, but generally those are, those are a lot of the things that I think founders look for.

[00:11:05] Rahul: Yeah. And so I have one additional thing. And so what about, you know, ingraining into a founder, to ask really tough questions and like in terms of validating, your product, and also. Cool. Cool. Executing, learning to execute really fast based on, you know, being agile and

[00:11:24] Michael: Again, like having someone to hold you accountable for that stuff is super helpful. Like, I can't tell you how many times we, we spend time with founders and like, they're not spending enough time doing customer validation or they're like, they're asking the wrong questions when they do get customers on the phone or all of those things.

[00:11:41] Michael: Like. People make mistakes, especially if you're a first time founder and you've never done it before, like you're going to make mistakes, you're going to focus on the wrong things, you're going to be like hung up on what the website looks like when really like all that matters is you're building a product that customers want.

[00:11:55] Michael: And so like part of an accelerator is it's like guardrails to help help [00:12:00] hold you accountable in those like really early formidable stages where it's really important to like make sure you're just highly focused on. Customers, what do customers want? Are you building the right thing? Will they pay for it?

[00:12:13] Michael: Like all of that stuff is what really matters in that like really early zero stage. because you know, fundraising is all about in 2021, it was easy to raise with like a good narrative, in this market. It's harder and like, you need more substance and it's going to be more correlated to actual traction with customers and momentum around pipeline building.

[00:12:37] Michael: And so you really need to like get that right. And so, yeah, that's part of what, what we do through our accelerator is like help hold, hold founders accountable, make sure they're focusing on the right things, like make sure we're aligned on. Okay this week, like what are the things you're doing to move the needle on customer traction?

[00:12:53] Michael: Making sure you're building the right product. Making sure they'll pay for it.

[00:12:56] Rahul: Yeah. So, you know, you do this with, [00:13:00] maybe a bunch of startups and then you realize some of them might not turn out to be like a venture scalable business. then what do you do usually?

[00:13:09] Michael: yeah, look, so, we invest in, we've invested. So just to quickly back up, so, so I launched this nine and a half years ago, as AB two B SaaS focused accelerator. So fast forward nine and a half years, we've worked with. Probably about 400 something companies will do, we'll, we'll invest in maybe 85 to 90 companies through the accelerator this year.

[00:13:32] Michael: So it's kind of growing and snowballing and yeah, not every. Company is going to end up being venture scale and that's okay. Like the, you know, with the size of our accelerator funds and the terms that the accelerator comes in on, you know, like I'll give an example of like, we have a company that was in our very first cohort in 2014 and they raised a small angel round and kind of decided like he wasn't sure it was going to be a venture scale business.

[00:13:58] Michael: They, they kind of just then got [00:14:00] more, more capital efficient and they raised some debt from, you know, from some debt providers and they. They ended up building a business that like, look, it wasn't really fast growth and it wasn't venture scale. But they're doing, you know, eight figures in ARR now they're profitable.

[00:14:16] Michael: They're going to sell the business and it will actually end up being like a pretty meaningful return for the fund. And so like, you know, that's okay. Like if I'm the outside looking in, that looks like a failure that, that company will probably return our first fund, like, and we, you know, we've already returned our fund three times over.

[00:14:35] Michael: On that first accelerator fund. But like that will probably be another turn on the fund from a company that was like failed and wasn't venture scale. But because of how early we get in through the accelerator and the size of the funds, like it, it's, it's okay for that model. It's not okay if you're a traditional fund, it doesn't move the needle enough for you, but it, but it, it's okay in this model.

[00:14:59] Rahul: [00:15:00] Yeah. So, let's say for your own, for a founder for his or her startup, wants to pick an accelerator, how should he go about doing it? He or she would go over to it.

[00:15:12] Michael: Yeah. I think, I think you should first start thinking about like. What are your superpowers and strengths as a founder and what are your weaknesses or as founders and Where do you think you need the most help? And then try to figure out okay, which accelerators can kind of help fill the gaps around some of our weaknesses And then I think you know Then it's a combination of like talking to the accelerator to see if you think they actually can help fill those gaps And then more importantly is like talk to founders who went through the program And see what their experience was like and like, you know, ask for references, but also backchannel, like we have founders all the time backchannel with founders who went through our program.

[00:15:53] Michael: and so, you know, I, I just think that's, that's where you're going to get the most real answers is like [00:16:00] founders who actually went through the program and like, did, did they have a good experience? with the program and whether they raised or not, whether they were successful or not, like, did they have a good experience?

[00:16:09] Michael: Did it move the needle for them as a company? Did it help accomplish what they wanted to accomplish at the time? and I think that's the key piece of it is, is just finding founders who went through the program and asking about it, but then also just like being very, very clear around like what you want to get out of the program and do you think this program can get. Can help you achieve that.

[00:16:28] Rahul: Yeah. So, so in terms of what you want to achieve from an accelerator program, right, it's, it's not that easy for a first time founder to figure out what. What he or she wants from an accelerator, right? is there a clear framework that

[00:16:45] Michael: Yeah. Oh, so the way we think about it is like, okay, what, what do you want to accomplish over the next six months with your business? and if you're not sure, some of how we frame it is like, what milestones do [00:17:00] you think you can get to or need to get to in the next six months to get to the next phase of your business, whether that's raising the next round or making a key hire or whatever, and then work backwards from there.

[00:17:11] Michael: I'm like, okay. What would need to be true each of each week over the next six months to get to that point. And, and so that's what, that's what we help founders do is really think through that, that piece of it of like, okay, if you want to get to X number of customers, X amount of revenue, because we think that gives you.

[00:17:30] Michael: The best chance of raising a seed round in six months or nine months or whatever the timeframe is, let's work backwards and figure out, okay, on a weekly basis, what are the KPIs we think you need to be tracking towards to make sure you hit that goal? And then how can we support you in hitting those KPIs on a weekly basis is how we do it.

[00:17:48] Michael: but yeah, I think if you're a first time founder, a lot of it is just getting feedback from the market on what, what, what generally you think needs to be true for you to raise. [00:18:00] The cathode you need to execute on your business. And then, and then trying to try to fill in around that.

[00:18:06] Rahul: And, what do accelerators look for, specifically? And what do you, your accelerator look for in

[00:18:12] Michael: Yeah. I mean, so it's super early on average, you know, we're usually investing in like a founding team, probably on average, two founders, they may, they usually have some early version of a product. They may or may not have customers. They, if they may have some revenue, but usually not, not a lot. and so a lot of what we're.

[00:18:32] Michael: Looking at is the founder. And so within the founder, you know, I think one of the most frustrating things a founder can hear is that investor saying like, well, we invest in great founders, because if you're a founder starting a company, you probably inherently think you're great. Right. Or at least think you're like going to be great at this.

[00:18:49] Michael: and so that's always frustrating. So what we look for is founder market fit. Like, do they have some unique experience or insight that gives them an advantage in whatever [00:19:00] business they're building? So, so we invest in a lot of people who came from an industry and are building like a vertical SaaS for that industry, or they were an exec at a company and they had a firsthand experience with whatever problem they're solving now.

[00:19:12] Michael: so we invest in a lot of founders like that, where it's like. Really obvious, good founder market fit. and then we look at things like. You know, can they very clearly and concisely communicate how their market's evolving and like how they fit into that market and how they can win in that market?

[00:19:28] Michael: Cause the more clearly and concisely they can communicate that we think the higher likelihood it will be that they'll be able to fundraise. They'll be able to track, attract really good talent around them. They'll be able to get customers to buy their product before all the features are there because they can sell them on the vision and where it's going.

[00:19:43] Michael: And so I think like. Really good at communicating, and communicating about their business is important. and then we look for people who are just like, you know, are they like obsessed with the business? Which is like, you know, hard, hard to really tell in a, in a meeting or [00:20:00] two, but we're looking for like, you know, do they know the largest customer in their pipeline by heart?

[00:20:06] Rahul: Because they like obsess over it and think about it all the time. Do they like respond? To things quickly because they're just like on it and on top of it. Do they have like their data room together? Because like, they're just like, you know, on it, like, you know, we look for people who are like, like really, Organized?

[00:20:24] Michael: organized, good communicators.

[00:20:26] Michael: Like, just like, you can tell they're going to run it, like be able to attract talent and run a good company. so that's on the founder side. And then we obviously look a lot at, at just like market dynamics of like. Do we like the market opportunity? Is it big? Is it growing? How competitive is it? Do we, do they, do we think they have like an interesting wedge that will allow them to get in?

[00:20:48] Michael: So we look a lot at like, do we, you know, what do we need to believe for this to be a big company? And do we believe those things are possible in the, in the market dynamics?

[00:20:58] Rahul: And I [00:21:00] also, saw... Coachability and, uh, repeat founder mentioned on your website.

[00:21:05] Michael: yeah, coachability is important because if you're coming to an accelerator, you're coming because you want to get a lot of, feedback on your business, but you also. What ends up happening at an accelerator, especially some accelerators, the way it's the way it works, but like you interact with a lot of people, you're going to get a lot of feedback from a lot of people who are really smart, really successful, but also like have very little context on your business.

[00:21:27] Michael: And so part of it is like synthesizing all the feedback you get and being open to it, but also like then having conviction with. What you're doing based on all the feedback you're getting, which may or may not be similar, like you could get vastly different feedback and it can be confusing, but, but yeah, I think a founder needs to be.

[00:21:47] Michael: Open to feedback, open to change, open to being coached a bit. otherwise like there's really no point in going into an accelerator. and then repeat founders. I think, you know, [00:22:00] generally. If you're a founder who like had a big success, like you're probably not going to go through an accelerator.

[00:22:05] Michael: It's an expensive form of capital, but if you're a founder who, you know, got a little bit along, but it, you know, it wasn't a huge success. It was like an acqui hire or maybe you ran out of money or maybe it didn't work. I think you, you generally like learned a lot from that experience. And we love working with founders who have been through that because they tend to be more focused on the right things.

[00:22:26] Michael: The next time around, like often they had a lot of learnings from the first time and, and they, they, they know where to focus, where not to focus. They tend to be like more coachable. I, I think generally it's a, it's a good trait when a founder has been through it, even if the first one didn't work,

[00:22:44] Rahul: Yeah. Yeah. In terms of, investment, deal term for an accelerator, generally, what is it, right now?

[00:22:52] Michael: it's all over the place. I, you know, I think, ours is a hundred K for seven and a half percent. I think tech stars is, I think they [00:23:00] still do like their. I think it's like 30 K for 6 percent of the common. And then they do another a hundred K note, at a 3 million cap, I think. but they're all generally, I think they're in the like. Hundred to 150 K range for like five to 8% is kind of the range that most accelerators are in. I think there are a few exceptions, like some funds that have spun up accelerators recently that, that look more like kind of standardized pre-seed deals versus, accelerator. so there's certainly some other, other models out there, but I think that's the most common is that in that like a hundred hundred 50 k range.

[00:23:40] Michael: And then like the kind of maybe six to 8% equity range.

[00:23:45] Rahul: So there's one accelerator that I know, who invest, in safe but uncapped. Do you think that is a fair thing to do?

[00:23:52] Michael: they invest in safes with an uncapped note and it's just a most favored nation on, on the next safe [00:24:00] round or uncapped, and it converts at the price round.

[00:24:02] Rahul: That detail I'm not sure.

[00:24:04] Michael: Okay. So I would say, yeah, I, I mean I wouldn't do it. We never invested on cap notes or safes. I think it's a little bit different if you do what YC does on their 500 k. Note where it's, uncapped, but it's a most favored nation on any subsequent safe. So whatever cap the next safe is on is where it is, where it converts into.

[00:24:27] Michael: if it's uncapped and it just converts at the next priced round, I think it's like. I don't understand how that map works because they could not raise a price round for two years and then you're getting like a slight discount to whatever the price is two years from now and then you don't get paid for the risk you were taking two years earlier.

[00:24:46] Michael: So I find that I would guess they have like a most favored nation clause where it, it takes on the cap of whatever the. Next safe is, would be my guess, but, but yeah, and I think if [00:25:00] you do that, that's okay, but that's part of what drives the price up for YC is like once they started doing the 500 K safe, like founders don't want to take safes in at lower prices because that 500 K just converts in at that cap and so they're, they're, incentivized to try to.

[00:25:18] Michael: Increase the cap as much as possible. So that 500 K comes in at the highest cap possible.

[00:25:22] Rahul: Yeah. Yeah. Yeah. So, in terms of, you know, you know, what do you think are some of the reasons why a startup should not join an accelerator? You mentioned about expensive form of capital.

[00:25:37] Michael: yeah, I mean, that's probably the most obvious one is. It is more diluted than other forms of capital. So if you feel like you don't need tactical support, you've got a community around you of other peers, you don't, you like can get in front of a bunch of other investors, you don't really need help with, with fundraising, then, you know, maybe it's Maybe it's not for [00:26:00] you, or maybe you can raise, if you can raise like a full round without going through an accelerator and raise like a pre seed round or seed round, then you probably don't need an accelerator.

[00:26:10] Michael: so yeah, I think those are the reasons. That's the main reason is just the, the, you need to make sure you actually need what an accelerator provides in order to justify giving up the amount of equity accelerators take.

[00:26:25] Rahul: Okay, so I'd love to know more about the business model of the accelerator itself from your perspective like, um, because, you know, with YC and Techstars, there was an explosion in the number of accelerators at one point and then most of them kind of

[00:26:44] Michael: Yeah.

[00:26:45] Rahul: So, and, and usually the thing is that it's not a sustainable business, why so?

[00:26:50] Michael: Yeah, it's hard. It's a hard business to run. It's operationally heavy, but the fund sizes are small. So it's hard. You can't run it on like a [00:27:00] typical venture fee structure. so a bunch of accelerators run a bunch of different ways and make it work like tech stars. you know, I think obviously went the route of a lot of sponsors and corporate programs where they got paid a lot of money to run corporate branded accelerators and that drives a lot of revenue and helps pay for all the operations.

[00:27:21] Michael: but, and then like 500 startups did the, you know, they had, they charged their LPs fees, but they also do like a program fee that they charge back from the founders, which is. Really like doing a fee. It's just kind of more advantageous for the LPs from a tax perspective. but yeah, I mean, the only way to sustain as a, as an accelerator, just to take a step back of like why it's operationally heavy, the only way to like run an accelerator for a long time and sustain it and justify and earn the right to like, have this expensive form of capital is you need to be. You need to be providing an amazing founder experience [00:28:00] where founders time and time again, we'll say, I'm glad I did that. Like that trade was well worth it because I got X, Y, and Z, or it was such a great experience. Or I was able to raise money. Whereas I struggled before or whatever the reason, but they need to have, you need to have.

[00:28:16] Michael: Almost all of your founders rave about the program or you like, don't, you can't sustainably earn the right to, to like charge the terms and accelerator charges for what they do. and in order to deliver on that, like, you know, you, there's a lot that goes into it and so like you end up having to have a much bigger team than what your normal AUM would, would allow you to have and, and, and so.

[00:28:43] Michael: It's hard. So like a lot of accelerators, like they think they can do it with like a fee, normal fee structure and sponsorship revenue. And like, there isn't enough sponsorship revenue to support that. So you need to be creative on the fees somehow, or you need to raise money into your management company, or your whole school, which tech starts at 500 [00:29:00] and both done, like you need to.

[00:29:02] Michael: Figure out ways to grow the team well ahead of where fees are and hope that you can then get big enough that you can then bring in new sources of revenue, to keep going. and, and that's hard. So, you know, we ended up, I had to raise money into the management company early in the process. And, those investors. I think made a really good investment now in hindsight, but, but at the time, like I needed the capital to grow the team ahead of where fees and sponsorship revenue were in order to make sure I was delivering an amazing founder experiences. I knew we wouldn't exist if I didn't do that. And then now we have.

[00:29:40] Michael: The way our funds are structured is, is we just have like much higher fees than a normal venture fund, and the fees are front loaded so that most of the fees come in when we're running the program. So we're not relying on sponsorship revenue. I didn't want to be relying on that. And the math still works for our LPs.

[00:29:57] Michael: But we needed to build a track record to prove [00:30:00] that the math would still work for them with the fees higher than normal and front loaded. so that's how, that's how we run it. So we're, we're 30 people full time, but it's across our three strategies. So we have a precede seed fund, which does a mix of like follow on investments in our own accelerator companies.

[00:30:16] Michael: Plus. You know, traditional kind of pre C and C deals outside of the accelerator. We have our accelerator, which is our core business. And then we have a venture studio, which we can talk a bit about if you want, which is probably 10 of the 30 people. So the other 20 are, are kind of across the accelerator seed fund or like our shared platform and back office team.

[00:30:37] Michael: so that's a lot of people for like, for where we are at from an AUM standpoint. and so you have to get creative on how you run that, run that business and you have to be like maniacally focused on delivering an amazing founder experience or you're not going to last as an accelerator.

[00:30:51] Rahul: Yeah. Yeah. I would love to know more about the Venture Studio and, and it's not just Venture Studio, right? There's also Incubator,[00:31:00] and then there are talent investors like EF and Antler. So, how are all these different from, uh, an accelerator, startup accelerator and

[00:31:09] Michael: Yeah. Yeah. I think, so I'm not, I don't know, I haven't dug too deep into Antler and EF's model and the pros and cons of it, I think. it's probably a little bit different in that there, there's no trade of equity when they first come into the program, right? It's like a, Hey, come in. We'll give you some, my understanding is like fairly light programming and stuff and, and help you.

[00:31:33] Michael: Navigate the business. They track you, they see how you're executing, and then they reserve the right to follow on out of their fund at a later date, but they don't have to. So, I kind of, you know, I think there are clearly pros to that model, but I think it's a little bit of what you saw happen with a lot of the corporate accelerators with tech stars where.

[00:31:53] Michael: Every company comes into the program expecting to get in the, in the Techstars corporate case, [00:32:00] like a relationship with the big corporate, like that's why you're going to Target's Accelerator or Disney's Accelerator or whatever, it's because you expect to get some big relationship with Target or Disney.

[00:32:09] Michael: And what ends up happening, in reality, from my understanding, is like, Two to three of the company is maybe get it of the 10. And then you end up with like seven that are wildly disappointed because their main motivation for doing it was because they thought they were going to get a relationship with the big corporate.

[00:32:25] Michael: So I think that that model, you run the risk of that a bit of like, you get all these companies coming in and they all think they're going to get the check at the end, but I don't know what percentage do. Get it. I don't think it's all of them. And, and so then do you run the risk of having people who are like disappointed with the program?

[00:32:42] Michael: And then therefore that can start to dilute your brand over time. Now I say all of that. I think Antler, I think both EF and Antler have. Done a phenomenal job, have grown a lot, have raised a lot of money. So like, I'm sure their models working for them, it seems like. So,[00:33:00] I think it just goes to show you that like, there are a lot of models that can work in the startup space.

[00:33:05] Michael: and yeah, I, I've heard, I've heard mostly very positive, like very good things about both of them.

[00:33:11] Rahul: But, but, but it's, it's an even more expensive form of capital, right?

[00:33:16] Michael: it's more expensive in the sense that you, I think it's. I think they're similar to accelerator terms, if I'm not mistaken, I think it's more expensive in that the opportunity cost of like you spend, you could spend a bunch of time with them and hopefully it's helpful. So maybe it's not a loss, loss of time, but you spend a bunch of time and then couldn't end up not getting the check, or you could spend a bunch of time, figure it out, raise money and then also now have like contractually obligated to take, take the check in at.

[00:33:47] Michael: Okay. Much lower terms than where you're now raising money at because you've made a bunch of progress as a business. So, yeah, I mean, it's a, like I said, I think there's pros and cons to the model, just like there are pros and cons to a [00:34:00] standard accelerator model or any model, right? There's gonna be pros and cons to it.

[00:34:03] Michael: But I also think it's like very different than a venture studio. I think incubator, yeah. And venture studio tend to be like pretty interchangeable, but, but yeah, there's also a lot of, like, I think, I think what's interesting, we recently started our studio about a year ago and I think studios are sort of where accelerators were when I started the accelerator in 2014 of like.

[00:34:26] Michael: There were, there's, there's been some that have existed for years, some of which have been pretty successful. There's now, we're in the midst of like an explosion of studios. I think there are tons of them popping up all over the place. And then I think you're going to see over the next... Three to five years, like a lot of them won't sustain and some will, and then there will be like some that rise to the top and a couple that are like wildly successful.

[00:34:57] Michael: but yeah, I feel like we're in that like early [00:35:00] phase of, of like explosion of studios now where accelerators were in like 2014, 2015, 2016. So it'll be interesting to see how it all plays out.

[00:35:09] Michael: Yeah. how do you think one can do the venture studio model? Well, you know, you've just started it, but still, how, how, how can somebody do this well? Yeah, I, you know, the jury's still out. I think, I think we're set up, uniquely set up to execute on it. And then what we did is we went and talked to founders who work with studios. We talked to like dozens of studios. We talked to downstream investors. And I think the key for all of this is a lot of the early successful studios took a lot of equity that created a lot of angst with downstream investors.

[00:35:44] Michael: And so now you have, like, this. pressure in the market where I think like the actual amount of equity that studios end up taking in a normal state is going to go down from where the early studios went. And, and so [00:36:00] the key is finding like the right balance of like what's palatable to downstream investors and to attract good founders, but also is enough.

[00:36:08] Michael: Equity for the studio to get compensated for all the work they're putting in. And that differs based on the studio. But, and so, you know, we, we landed. Where we have 10 people full time. We have, you know, three engineers, designer recruiter, you know, BDR, like we help build the initial MVP. So we've come up with the ideas that mostly internally, sometimes with people in our community or corporates in our community, but, we then validate, and, and, and like.

[00:36:38] Michael: Figure out like, okay, is there, is there a market opportunity here as a venture scale? Do we think we can we figure out like what is a wedge that customers would be interested in and pay for? And once we have a validated idea in a market, we really like, then we go find a founder to kind of attach to that idea and keep iterating with us.

[00:36:57] Michael: And ultimately we want that founder to [00:37:00] have. More than 50 percent of the business post our money going into the business and post a large option pool for the first one to two key hires, which we think puts them in like a better position than if they had a technical co founder from the beginning, right?

[00:37:17] Michael: They'd probably split it 50 50. They'd raise some money. They'd both get diluted by it. They'd create an option pool. They'd both get diluted by it. So they end up with like. Quite a bit more equity than they would have had if they had a co founder initially, and we think we then end up with between the investment we make, plus the common we get, we think we then end up with enough to compensate us for having 10 plus people full time on it, building the product, validating it, lining up customers, all that, coming up with the idea, all that stuff.

[00:37:45] Michael: And we'll see, like, I think it's the right. I think we're like honing in on the right balance. but we'll see how, how the market kind of normalizes over time. but I think you're going to see pressure on some of the early studios who [00:38:00] were taking a lot of equity, to come down on equity over time.

[00:38:03] Rahul: yeah. and going back to accelerators, you know, the definition of accelerator, I was looking it up. It's like fixed term cohort based program, including mentorship or educational components that culminates in a, demo day or a graduation event. Why these things, you know, why is it a fixed term?

[00:38:24] Rahul: Why is it cohort based?

[00:38:26] Michael: I think those are great questions that we ask ourselves all the time, and we've iterated quite a bit where we, I would say, don't fit into that exact definition. I think that definition was based on like what YC built initially. Right. And I think when every accelerator us included, spun up, you were like, okay, well that's the, that's the, the golden standard.

[00:38:47] Michael: Like let's set it up that way. That must be the best way to do it. And maybe it is, but over time we've changed it a decent amount of how we do it. so we do rolling acceptance. Now we then do kind of bucket people into [00:39:00] cohorts. we're, we're now doing, putting people into like kind of quarterly cohorts, but then they overlap.

[00:39:05] Michael: I think the cohort piece is important because of what I said before around being surrounded by peers and community and like interacting with other people. I think it's like super valuable, a really valuable part of an accelerator. And so I think it's important to have some semblance of co op based.

[00:39:20] Michael: We do co op based. We also try to match people with other founders in like the same industry. So, so it might not even be like they're at the exact same stage, but maybe it's a bunch of companies selling into health systems and they can like share leads or share war stories of trying to sell. Sell into a health system because the sales cycles are really hard.

[00:39:38] Michael: and so we'll try to like connect, like we'll have a channel on our Slack for like health tech founders, and we try to connect them as like a separate little like cohort, but then there's the cohort of people who are going in at the same time as them. and then demo day, like. Yeah, I think what you saw happen, and YC has done this now, too, is COVID forced a lot of it to go virtual.

[00:39:58] Michael: So it used to be all in [00:40:00] person demo days, which we used to do, too. But when you really think about it, the goal of a demo day is to get a, An investor to opt into taking a meeting, right? Like that's the goal of a demo. So we were like, all right, let's just instead run an investor week where we have like a whole week to outreach.

[00:40:16] Michael: We create a landing page. We have them set up their deck and their blurb and whatever else. And then a button and then like a Calendly link to actually book a meeting with them. And then we send it out to investors. As part of investor week. And we say, Hey, if you're in, like, here's all the founders that are going out to fundraise, if you're interested in that, you just book a meeting with them.

[00:40:34] Michael: And then we just set KPIs internally of like how many opt in meetings did we get for each company? And so like our goal, we set a goal of like, we want to make sure we get a minimum of like, whatever, 25 or 30 meetings per company. And like, ultimately that was the goal of the demo day. And now you don't have all the pressure of like, are people going to show up to an in person event?

[00:40:54] Michael: Is it going to be all associates versus partners? Is it, you know, who's going to, who's going to actually be there? Cause [00:41:00] unless you have the, the gravity of YC, like for any other accelerator, it's, it's hard to get the right people in the room that are like the right stage. Especially in a post COVID world where like people are more distributed and and so I think that model works really well and it's, and then we do it where.

[00:41:20] Michael: you know, most accelerators will say like, okay, your demo day for your cohort is X date. And our thought was like, well, why is like this arbitrary point in time that we have scheduled for a demo day, the right time for you to go fundraise? It's like, it's not in most cases. So what we do is we have three investor weeks a year and we tell every company, like, regardless of what cohort you're in, just.

[00:41:45] Michael: Whatever investor week is the right time is the best timing for you. You can participate in that investor week. And so we have a back and forth and we go, we figure out what the company, like, do we think you're ready for, you know, the one we're doing in October, or should we wait till like [00:42:00] February, March, or should we wait till May?

[00:42:01] Michael: Like, what's the right timing based on what we think needs to be true for you to raise this round and go out in that one. Like you don't need to go out just because we have this thing on the calendar, that's like an arbitrary date. Like if that's not the right time for your business, don't force it. Like don't go out during that time.

[00:42:18] Michael: So, so we, we do it a little bit differently. I think that definition was basically someone defining what accelerated, what like YC does, and it just stuck on the internet. but I think you're, you'll see accelerators kind of. Iterate on the model a bit, to kind of figure out what's the right, what's the best thing for the founders and the companies.

[00:42:35] Rahul: So what are some challenges for accelerators at the moment? You know, I can think of a few. One of them is like, you know, these large VC firms with platform teams moving into Also starting accelerator programs, similar to like Sequoia, I think they have a program called ARC or something.

[00:42:56] Michael: yeah, I mean, just like any [00:43:00] fund at any stage, the biggest challenge is always competition. Competition for the best founders. Right. And, um, you know, there's always different sides, like in 2020 and 2021, the competition was like all the rolling funds and syndicates and like precede funds that popped up.

[00:43:21] Michael: Like it was just easier for a team with an idea, even first time founders to raise capital than it had ever been since I've been doing this. And that created a lot of competition and pressure for accelerators who were a more expensive form of capital and maybe provide a lot more but but like if you have a rolling fund on AngelList offering you 200k at whatever a 10 cap like you're probably going to take it right so so that there was that competition in 2020 and 2021 now I think there's less funds willing to take pre seed risk but you see More traditional funds coming in and starting accelerators.[00:44:00]

[00:44:00] Michael: The reality is like, when we see those, like a lot of those aren't doing it at. At meaningful enough scale to like really impact it. Like the arc program, the square runs probably has like, I don't know, 10 companies each time they run it. Like, it's not like they're taking a ton of early stage companies, like out of the market.

[00:44:18] Michael: and YC has come down on volume from their peak in 2020. And that was the other thing is like in 2020 and 2021, like. YC went from 200 to 450 companies in a cohort. So like the volume from these other newer things are, are, uh, are less and less, are a lot lower than, than like a bigger accelerator coming in.

[00:44:42] Michael: and there's just less funds willing to take precede risk, especially for first time founders. So we've actually seen like a pretty big increase in our top of funnel applications for the accelerator this year. And. we'll go from doing maybe 45 to 50 companies last year to 85 to 90 companies this [00:45:00] year through the accelerator.

[00:45:00] Michael: So, I think there's just like, there's becoming less competition at that really early stage because it's just hard if you're not, if you don't fit the exact profile that every VC is chasing of like early employee at a, you know, name your hot venture backed company or repeat founder who had a big success. It's hard to raise capital out there. Like it just is. And, and so, I think an accelerator can be really helpful for a lot of, a lot of those founders, to help you kind of really get, get some of that early traction you're going to need to show to, in order to raise.

[00:45:35] Rahul: So what are some of the challenges, for, for the accelerators now?

[00:45:42] Michael: it's to your point, like sustainable business model, uh, it's competition always, there's always competition. Like we're always the founder founders we talked to who come into our program, like often have other options as well. And so there's always [00:46:00] competition. and, and then I think it's just finding good, like a lot of the founder experience is driven by the MD of the, of the program that is working closely with the company.

[00:46:11] Michael: So. I think part of it too, is just like finding really good MD, like you're, you're only as good as, as your M as the MD, that's working with the founder because of how important they are and driving the founder experience. So part of it is just like, you know, making sure you have really good MDs who founders want to work with and are excited to work with who can really move the needle, both from a network and tactical operating standpoint.

[00:46:36] Michael: so I think that's, that's another like thing that you need to get right as an accelerator. yeah, those are the main, those are the main things. And then also like help fundra you know, fundraising in this market is hard, right? So like, obviously one of the challenges is like, how do you optimize getting your companies funded after the program in a market where fundraising volume, like deal [00:47:00] volume in fund in, in early stage is down quite a bit.

[00:47:02] Rahul: yeah, and, maybe this is not relevant, but the cost of creating a tech company is even cheaper than what it was maybe 10 15 years ago, right? So, does that have any role into play? I mean, does that play a role in making this accelerators, model challenging?

[00:47:22] Michael: no, I mean, I think it, it almost helps because you can get further on a smaller check. Right. And, and I think the other thing that's happened is the mindset shift from 21 where it was like growth at all costs to, I think now founders are much founders and investors are much more conscious around like how do you build capital efficiently.

[00:47:41] Michael: And so I think it actually helps us because now we're only putting in 100 K out of the accelerator, but I think founders now are stretching that 100 K further than they've. Than they've done in the past. Because they can be very capital efficient. They can hire less, they can, you know, get further along with [00:48:00] less, with less capital.

[00:48:00] Michael: So I think it actually helps us versus hurts us.

[00:48:04] Rahul: Is that a unique insight? you know, you've been running an accelerator for close to a decade now that you can share with me about, uh, running an accelerator.

[00:48:13] Michael: yeah, I mean I, so I, I think, I don't know how unique it is, and I've mentioned it already. But a core KPI that we've had since the beginning has been MPS of the founders going through the program. And it's one of those things where like, I think everyone, every accelerator would probably tell you it's important, but like, it is the most important thing.

[00:48:38] Michael: Like, I just don't understand how you can. Unless you're, unless like you either build a brand by delivering an amazing founder experience for a really long time over and over and over again. and also having a lot of successes you can point to, and you can overcome. One or the [00:49:00] other by being like really good at one or the other.

[00:49:01] Michael: Ideally you have both. I think YC has, has done a great job of having both. but like, it's the number one thing that you need to get right. And I think it's one, it's something that we've been like very, very focused on from day zero when it was just me for the first two years, like running around like crazy.

[00:49:19] Michael: I, I wildly underinvested in marketing and brand building and top of funnel. And wildly over invested in founder experience. and I think it, you know, took a long time to pay off with like organically building the brand, but, but I think it did. and now, and it's allowed us to sustain for this long and be in that like top.

[00:49:40] Michael: You know, I think, I think we're in that 500 tech stars alchemist. Like we're in that, that kind of tier of accelerators now. And, and I think, you know, have, or have a lot of momentum behind this now with. LPs who want to just keep funding it, funding it. So it should be [00:50:00] around for a long time.

[00:50:01] Rahul: Yeah, when founders have a bad experience, they will definitely talk for sure.

[00:50:07] Michael: Yeah. And it happens like we're not going to get it right every time. Right. Like, and usually when they're, when a founder doesn't have a good experience, it was a misalignment and expectations, which can often be solved by like better communication upfront. but, but that's usually what, what would cause it.

[00:50:24] Rahul: Yeah. And, if you are a B2B SaaS startup, why should you, why should you join forum VC instead of let's say YC?

[00:50:35] Michael: yeah, I mean, look, it's going to be small cohort sizes, very hands on. We're basically like a fractional co founder with you and, and we'll be, you know, I think we can be like very helpful tactically that we've worked with 400 plus SAS companies now. And so. Can get in the weeds around it. A lot of the MDs have been like founders themselves have raised capital and, and, and built SAS companies from [00:51:00] zero to, you know, millions in revenue.

[00:51:02] Michael: And, and so I think a lot of it is just that, like, if you want that very hands on tactical support from operators who have built SAS companies, I think we can be a really good option. And then have built a really good community and, of other founders of openness of vulnerability. Like, you know, we, I think our founders like feel comfortable sharing stuff with us that they wouldn't share with most investors just because we've created this culture of, of like very open communication and it's okay to fail and it's okay to like, not everything's going to go right.

[00:51:35] Michael: And. And so I think a lot of it is just like the, the culture, the community, and then the like very hands on technical support specifically focused around that.

[00:51:45] Rahul: Cool. This is great. Thank you so much for taking the time to do

[00:51:49] Michael: Yeah. Thanks for having me. I appreciate it. It was fun.