The early stage/seed game is changing, and Silicon Valley’s venture firms need to start playing by the new rules.
New-generation incubators are taking root, and the valley’s traditional firms aren’t participating, despite the relatively small amount of investment.
First it was Y Combinator. Yuri Milner and Ron Conway’s SV Angel last month decided to give each Y Combinator startup $150,000 on relatively easy terms — convertible debt.
Thursday, Dave McClure’s 500 Startups raised the stakes by unveiling its 500 Startups Accelerator. Each startup in the accelerator will get between $25,000 and $100,000 in exchange for about 5% of equity. (Pretty easy, eh?)
In return, the startups will have access to mentors, workspace, design resources and assistance developing customer acquisition programs.
So how much will this cost? The 500 Startups Accelerator announced its first class of 11 startups. If each gets, say, $75,000, the total equity investment will add up to $825,000. One solid exit would cover that.
So why not play this new game? Venture investors seem caught in the headlights by these creative new ways to underwrite seed stage investments in an era when startup costs for Internet companies have dropped through the floor.
Sure, VCs pride themselves on their hands-on advice and close mentorship. But with the ability to examine and test new online service and distribution ideas in record time, perhaps playing the numbers game — instead of the quality game — makes sense. It certainly seems to be how Milner sees it.
In any event, it is a fascinating change to watch. And by the way, here is the first class of 500 Startups Accelerator companies, courtesy of VentureBeat:
- InternMatch, finding internships for college students;
- Baydin, e-mail services;
- 955 Dreams, mobile services;
- YongoPal, teaching Asians English;
- Spoondate, dating for food lovers;
- Ninua, collects stories;
- Crowdrally, paying people for endorsements;
- Rewardli, helping businesses leverage social graphs;
- Wednesdays, planning Wednesday lunches;
- SpeakerGram, connecting storytellers;
- Stealth-mode company.
Good luck, all.