keeping them around for three full “trimesters”—the first focused on product development, the second focused on customer research, and the third focused on staffing up and fundraising.
“That will have a higher result at the other end,” Relan says. “Nothing against the YC model—if I were an investor putting money into YC, the expected returns are not bad—but it’s a different approach. They take a whole bunch of stuff and throw it against the wall and see what sticks.”
The accelerator is renting space inside Pier 26, directly beneath the Bay Bridge in San Francisco. I attended the accelerator’s grand-opening party in late October and interviewed Relan and Held. A slightly abbreviated version of our conversation is transcribed here.
Xconomy: You are tweaking certain knobs of the accelerator model, like the length, the amount of money you provide, and the amount of equity you request in return. What makes you choose your specific numbers?
Peter Relan: Most people think of the input. We always think of what are we going to graduate. We never wanted what I would call “two hackers and a demo.” After a certain amount of time, there are thousands of teams that are two hackers and a demo, and it creates this sort of feeling of not enough value being created by accelerators. We always wanted a founder/CEO with a company, versus two hackers and a demo.
So we broke the program into three distinct phases, the first of which is what we call the MVP [minimum viable product] phase. That is one-third of our program, but that is the entire program at most accelerators. We find that you can build a feature, but you can’t build a company, in three months. In three months you get something going.
Then there are three months more of what we call product-market fit, where you are tweaking it and trying to understand if customers are reacting well to your product. What tweaks should you make, or should you pivot completely?
And then the last three months is team building and funding. There is no one demo day. We have 90 demo days. We have three months to take the company out to various venture capitalists. So we just believe that that’s how you build a real company. You can certainly churn out teams with demos in 90 days, but that wasn’t our role, ever.
Jerry Held: Back in the ‘70s, it was hard to start a company. You didn’t even start with a microprocessor. You had to design your own computer, your own operating system. It was hard. And then you built you own sales force, your own service operation. It was really, really hard. The thing that’s changed over the decades is that it’s gotten easier and easier. The bar to starting a company has gotten lower and lower because there’s so much infrastructure, including all of the software, distribution channels, app stores. The bar to start a company has been lowered so low that within a matter of weeks or months you can get something that looks like a company off the ground.
When the bar is lower, you have huge numbers of people starting companies, because it’s inexpensive. So what we have now is tons of companies being formed. And the venture community can’t deal with that. So what used to be known as seed investments, they have gone completely away from. Even Series A is what used to be Series B. They don’t have to take that risk.
So what’s happening in this space, the way I see it, is there are all these things hatching. There were these incubator guys, people like Peter, who were very hands-on, and mostly got successes out of it. And then there was this overabundance of accelerators. I wouldn’t even really call them accelerators, because they don’t do much acceleration. They speed them up a little bit. But they never got them into fourth gear; they got them into first gear. They took a large number of companies, put them out the other side, and most of them died. A few of them got funded.
The model for an accelerator, for Y Combinator, is not a bad model for them, because they can have 99 failures out of 100, and if they get one good one, they have made money. Now of course, 99 companies fail in the process. The question, I think, is how you get the right mix. I would call Nine Plus an “inculator.” That’s what I think we are trying to do here. To move in between.
The problem with an incubator is it doesn’t produce enough output. It’s hard to scale. The problem with an accelerator is it’s too short a time, it’s too superficial, it doesn’t get to second, third, or fourth gear. I think what we are doing here is in between an incubator and an accelerator. It’s a new model which I think is the right model. The model of more involvement, more hands on. It’s one on one. Getting each company to MVP—but that’s only the beginning—and then seeing how the market is accepting it and doing a pivot. Getting them ready to be funded. And actually helping them get funded, not having them stand up at a demo day.
X: It sounds like your thesis is that the companies will be more authentically investable by the time they are done.
JH: They will be real companies that have a higher probability of getting a Series A investment.
X: A lot of companies that come out of Y Combinator get some funding. There is a huge crush of angels and VCs at every YC demo day, trying to invest. So much so that they’ve had to set up special systems like the handshake deal protocol. So it’s not like they’re not getting funded. But you’re saying that your companies are going to be more successful.
PR: We believe that both models work from an investor perspective. Clearly, with YouWeb, we did very well. YouWeb and YC are the top two in terms of cash-on-cash return—the best in the world. Next is Techstars, I think. And we are all in the same vintage, 2006. It’s my belief that
