Ask any investor in the world what they look for when investing and I guarantee they’ll say team, team and team. The mantra when investing in early stage companies has always been that “we rather invest in a great team with a bad idea, than a bad team with a great idea”. At Accelerace we totally agree by the way – but why do we keep investing in companies when what we really want is to invest in the entrepreneurs?
In early stage start-ups there is no difference between the company and the founder team. The founder team is the company. As the company grows it starts to build culture, processes, best practice, etc. and in this development the company becomes less dependent on the founder, and can even start making changes in senior management. This point is usually reached when the scalable business model has been found and at that point taking a risk on the company makes sense, but – in my mind – not before.
Most accelerators today invest small stakes (15,000-30,000 US dollars) in their portfolio of early stage companies alongside the help they provide the team during the accelerator program. In exchange they require an ownership share of the company (6-15%). This model means running a risk on the company (disclosure: Accelerace has a different model, but also focused on the company http://accelerace.dk/accelerator/the-deal/).
Shifting to an entrepreneur based investment model
Accelerators should be about learning – about designing a process that maximizes the skill set of the founder team. The end result of any accelerator is then two things; 1) an increase in the company’s chance of success, and 2) entrepreneurs with better skills making them more likely to succeed. Better skills normally translate into higher life-long income, which is why people are willing to pay tuition fees at universities and society invests so heavily in education. If accelerators actually do develop the skills of the individuals in the founder team we would expect a higher life-long income no matter whether they succeed with their current venture or not. Following this logic, investments should be made in the individual entrepreneur and not their company.
There are plenty of models for investing in individuals. One way is to provide personal loans with an upside on the expected life income – an income which is expected to be higher due to better learning. This could be a loan with an interest rate of 10 percent as long as the company is alive and a decreased interest rate if the company does not develop as expected. The decreased interest rate should be calculated as the difference between expected income and actual income.
A win-win situation
If an accelerator has truly taught the entrepreneur something, this person will have a higher life income which translates into a bigger return for the accelerator. If the accelerator fails the entrepreneur will have a lower income and therefore pay a lower interest – if anything at all. This model of funding learning is widely used in the educational sector.
Seen from the perspective of the entrepreneur this model makes a lot of sense. The entrepreneur gets to keep a bigger control of his company and therefore a bigger incentive to succeed. He also reserves equity stakes for later investors avoiding too big a dilution at an early stage and we establish a very close relationship between what should be the focus of an accelerator and the investments done. Because after all – If you do not believe that an accelerator can increase your skills why participate and why hand over part of the company?