Can you buy equity back from an accelerator?

My answer to a question on Quora… I liked the answer well enough to post it here.

The only way you could negotiate a buy-back of equity is if things are going very poorly; and probably not even then. I’ll explain why.

An accelerator gets very inexpensive equity (often ~6-10% for less than $50k).

The reason is that they are providing substantial non-cash value: mentorship, access to their network, and exposure to investors at demo day.

Even if a company has already raised money, the accelerator almost always gets their equity cheaper than prior investors. They certainly get it cheaper than investors on demo day; which represents the superficial business model of an accelerator program: get their money in early at a steep discount, add value, and try to guarantee follow-on capital.

It’s a great business model.

It would fall apart if they accepted buy-outs of their equity position. Any company successful at raising money after the program should want to buy out the accelerator if it was an option, because the accelerator got the equity so cheaply (in monetary terms). Unsuccessful companies at raising would not buy back their equity, creating a negative selection bias.

So you might think if things are going poorly they’ll gladly take their money back? No. While the successful companies are great; in terms of return on the portfolio they are almost insignificant. Almost all the return on an accelerator’s portfolio come from the outliers (what Paul Graham calls Black Swans); a few companies that return gigantic multiples.

So the question they will ask themselves when you want to buy back your equity (whether things are going well or poorly)… is how do they know you won’t be the black swan? They’ll probably be unwilling to make that judgement. You can often learn more from your mistakes than your success, and the best outliers are often business models that get discovered in the process, and/or odd ideas that succeeded massively after appearing to fail.

fundraising is not merely a useless metric, but positively misleading. We’re in a business where we need to pick unpromising-looking outliers – Paul Graham

That, is the real business model of an accelerator program: Black Swan Farming.

Prove you’re not a black swan. You can’t, because they decided you had that potential when they accepted you into the accelerator program; and they are unlikely to throw away their betting tickets early.

Seattle 2.0

The Seattle startup community has grown up since I left Seattle eleven years ago. It is the world headquarters of Startup Weekend, an organization that reached all the way to Costa Rica and re-inspired me to start new companies again. It’s the home of TechStars Seattle, and numerous startup coworking spaces; including the recently opened SURF Incubator (Start Up Really Fast) on 2nd and Marion. It was on my July scouting trip that I visited SURF and reserved a desk as my Seattle working base. It is the same Seattle I remember vividly, yet uniquely different and better. It is Seattle 2.0.

I have decided to give Seattle another chance. I have made the personal and strategic decision to start in Seattle, rather than Silicon Valley. I regret I will only be able to visit my Silicon Valley friends and associates on occasional visits, yet I look forward to rebuilding my Northwest network and making myself a fixture in the Seattle 2.0 startup community.

First Contact

I will be in the San Francisco Bay Area between Feb 22nd and Mar 8th, and at SXSW Interactive (Austin) March 9th-13th. I am also unexpectedly in Seattle the 15th-16th of February, and in Los Angeles the 18th-21st, ahead of my originally planned trip.

I am moving to Silicon Valley in July, to become deeply involved in the business and science of startups. It is my goal to devote the next three decades or more to starting new companies, mentoring startups, investing in startups, and generally being obsessed with building companies and turning ideas into reality.

I’m seeking to meet people who are doing this already; individuals involved in incubators and accelerators, in entrepreneurship focused and mentorship centric organizations; active angel investors and seed-stage VC investors; and entrepreneurs building companies. To learn, share, network, and set the groundwork for future collaboration.

I’m not presently raising money. However taking advice from Mark Suster, I’m interested in meeting potential investors early who consider themselves “accessible”; to soak up as much advice as they’re willing to give, and informally share my ideas. This time next year I expect to be raising, and have applications with top-tier accelerators.

I’m also seeking to meet individuals with the passion, desire and skills to build companies; potential cofounders and early employees. Founding team is the key element in executing an idea and scaling a business; I’m seeking the absolute best, and will be liberal in sharing equity and upside potential.

Silicon Valley or Bust

It’s official; we’re moving to Silicon Valley.

While there may still be some debate on where the best place to start a company is, the San Francisco Bay Area is without debate the center of the Universe for Internet startups. I want to be in the center.

Especially after living so long, so far away from the center. On a sleepy subtropical mountainside in Costa Rica, I’d proved you can run an Internet business from anywhere in the world you have a laptop and an Internet connection. The problem is I’d forgotten who I had intended to prove that to or why.

A 19-year-old tormented by startup ideas asked on Quora what he should do. I suggested he massively self-educate himself with the skills needed to execute those ideas, and move immediately to Silicon Valley with a make it or bust attitude. I’m going to live my advice and do the same.