How accelerators and angel groups lose their way.

Riding on the back of the entrepreneur.

Ever drive by a construction site and see dozens of “supervisors” standing around, while one guy with a shovel is actually working? This is the perfect metaphor for the angel investment community, with the energetic, hard-working entrepreneur is deep down in the hole furiously shoveling, and everyone else standing around watching – and occasionally telling them what they are doing wrong.

The so-called “accelerator” and “incubator” racket.

The entrepreneur is always navigating through the fog. The process of entrepreneurship is to test their ideas, reform them, and try again. An entrepreneur will make countless sales pitches, only to be rejected over and over. The process is a frustrating cycle of failure after failure, and no matter how strong and resilient the intrepid entrepreneur might be, they always hit their limit.

Above all, the life of an entrepreneur is lonely. The entrepreneur has an idea, a dream, of their solution to a particular problem, and they quickly find out that nobody shares that dream. Every entrepreneurship story is about one person’s vision that persists long enough for a business to get started. Those that succeed are the ones who persisted long enough to find the end of the rainbow.

So-called accelerators and incubators cleverly designed to take advantage of the entrepreneur at their weakest moments, offering relief from endlessly bumping their heads. They offer the promise of introductions to investors or customers that have been frustratingly hard to get, “simple” plans for marketing/sales, and a warm, safe cadre of fellow entrepreneurs who are going through the same journey.

Accelerators and incubators pump entrepreneurs through their formulaic, one-size-fits-all program in assembly line fashion. Certain accelerators, especially the well-known ones, even have characteristic pitch designs, so much so that you can tell that they came from that accelerator.

“Successful” accelerators all have one core expertise: marketing and promotion. That is to say, they are good at marketing and promoting themselves, not that they are good at marketing and promoting the companies they are incubating. Maybe some of that will wear off on the entrepreneur, but it is not the intent.

The “customer” of the accelerators and incubators is not the entrepreneur, but the sponsors. Sponsors can range from non-governmental organizations that spend taxpayer dollars to promote business in a jurisdiction to large corporations that want to promote their goodwill and branding to a community.

The “product” of the accelerators and incubators is the entrepreneur. They are “selling” the entrepreneur to the sponsors, and, in turn, to the community at large in the name of the sponsor.

Note that nobody has a stake in the success of the entrepreneur, other than the funds that buy equity into the startups for absurdly low valuations – then show huge write ups at the immediate fund raising rounds.

The angel group racket.

Angel groups span a spectrum. Most angel groups start out with well meaning, active angel investors who write checks and work with the startup companies. They sit on the boards, work tirelessly with the entrepreneurs, and are a constant source of encouragement, ideas, and financing for entrepreneurs.

As an angel group becomes more formalized, the fun of working with entrepreneurs diminishes while the pain of managing a non-profit increases. The angel group’s leader becomes concerned with arranging the dinner meetings, consistent communications with members, organizing events, as well as the paperwork and administration of managing investments through various special-purpose LLCs, sidecar funds, and countless other tasks.

Inevitably, the angel groups transition from entrepreneur-focused to membership-focused. The programming becomes “edutainment,” where investors enjoy entrepreneur pitches while dining on steak and an open bar. This also comes with a transition (appropriately) to group leaders who have the skill set of managing organizations, not managing and helping entrepreneurs. The focus becomes putting on a show for angels.

Because the angel group manager does not have the bandwidth (and almost always the expertise) to find and vet startup companies, it becomes much easier to join up with other angel groups to “syndicate” deals.

Unfortunately, this turns into “taking out the trash.”

Deals that are not strong enough to be funded by one group get passed around to other groups. Rather than doing the due diligence and finding the structural failures that show why the startup was not funded by the first group, an angel group organizer can skip all the diligence, avoid any analysis of the entrepreneur and the founder, and sign up the company to present at the next meeting.

The second angel group assumes that the first group looked under the hood of the company and negotiated favorable terms, so they invest on the same terms as the first.

Without a strong, courageous, knowledgeable, and experienced angel investor who can diligence the deals before they come in, the second angel group winds up with extraordinarily poor investments.

Not only as the members of the angel groups are snookered because the angel group leader avoids the sticky, painful negotiation with the entrepreneur, the angel group leader sells the deal with the branding from the originating angel group.

It is amazing how quickly the tables are turned.

When an experienced investor runs the group, the focus is likelihood of an exit or return of capital.

When the second manager runs the group, their expertise focuses on administration functions of organizing meetings and running the group. The hard part of finding good deals is outsourced to the other groups.

The experienced investor wants to see well vetted, de-risked companies with high exit potential, but the second manager wants to see Multiples On Invested Capital (MOIC) returns – and can’t parse the difference.

I have had inexperienced (and incompetent) angel group leaders lament the fact that we were able to invest in a Series A-level company just months before it was acquired. This company was de-risked, revenue-generating, and with a great partner that eventually acquired the company. The return was a very profitable 30%+ IRR.

The inexperienced angel group leader was embarrassed that the MOIC was not 100X, and did not realize how special that opportunity was. This angel group leader did not realize that every investor did very well on that deal – and got their money back. The leader did not realize that investors were now anxious to reinvest and excited to see new deals. Over the last three years, none of the investments had any return at all, and many were complete write offs.

The leader did not recognize that as angel investors, we rarely get to see Series A-level companies, especially companies with solid customers, revenue, and an entrepreneur with a track record of exits. This jewel was a no-brainer for the experienced investors in the group, but he would never seek out these kind of opportunities.

What is the net result?

Just like the well-intentioned accelerator/incubator that grew past its mission to help entrepreneurs, angel groups can quickly do the same thing. Leaders who lack the expertise in due diligence and a history of investing cannot tell a good deal from a bad one. Sadly, the members of the angel groups – especially those new to angel investing – are badly underserved. The groups will devolve into a social club with nice dinners listening to entrepreneurs pitch, but will fail in their mission of (1) helping entrepreneurs and (2) building successful companies that return capital to investors – so they can invest again and again.

How to navigate this as an entrepreneur.

Angel groups, accelerators, and incubators can be useful for entrepreneurs, but it takes a lot of fortitude and hard work on the part of the entrepreneur. The entrepreneur is in the howling storm of building their business, and the accelerators and angel groups offer something that appears to be “shelter.”

For the entrepreneur, the “shelter” can turn into at best a distraction but at worst a derailment of their entire business. Most entrepreneurs find out that angel groups, accelerators, accountants, lawyers, marketing “experts,” and all the other components of the startup ecosystem are all just supervisors standing around the hole while the entrepreneur furiously digs and digs.

However, it is possible to pick up meaningful information, make lifetime connections, and get value out of the startup ecosystem. Entrepreneurs have to work doubly hard to find the good people within the ecosystem, establish relationships with them, and learn not just the superficial material, but the underlying principles that are there for the taking.